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ETF Arbitrage: Intraday EvidenceBen R. MarshallMassey University - Department of Economics and Finance Nhut H. NguyenThe University of Auckland Nuttawat VisaltanachotiMassey University - Department of Economics and Finance November 16, 2010 Abstract: We use two extremely liquid S&P 500 ETFs to analyze the prevailing trading conditions when mispricing allowing arbitrage opportunities is created. While these ETFs are not perfect substitutes, we show that their minor differences are not responsible for the mispricing. Spreads increase just before arbitrage opportunities, consistent with a decrease in liquidity. Order imbalance increases as markets become more one-sided and spread changes become more volatile which suggests an increase in liquidity risk. The price deviations are economically significant (mean profit of 6.6% p.a. net of spreads) and are followed by a tendency to quickly correct back towards parity.
Number of Pages in PDF File: 45 Keywords: Arbitrage, Pairs Trading, ETF JEL Classification: G1, G14 working papers seriesDate posted: November 16, 2010 ; Last revised: January 24, 2013Suggested CitationContact Information
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