Intraday arbitrage between ETFs and their underlying portfolios

Travis Box, Ryan Davis, Richard Evans and Andrew Lynch

Journal of Financial Economics, 2021, vol. 141, issue 3, 1078-1095

Abstract: Prior research suggests that nonfundamental exchange-traded fund (ETF) price shocks are transmitted to their portfolios through an arbitrage mechanism. We test this proposition by examining minute-by-minute returns and order imbalances but find little evidence that ETF trading impacts underlying returns. Specifically, panel vector autoregression shows that ETF returns do not lead portfolio prices. Instead, arbitrage opportunities arise from order imbalances and price movements in the underlying securities and are subsequently eliminated by ETF quote adjustments, rather than arbitrage trading. We extend our analysis to a daily frequency but still find little relation between ETF trading and constituent security prices.

Keywords: Exchange-traded funds; ETFs; Limits to arbitrage; Liquidity (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:141:y:2021:i:3:p:1078-1095

DOI: 10.1016/j.jfineco.2021.04.023

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