ETF Arbitrage: Intraday Evidence

45 Pages Posted: 16 Nov 2010 Last revised: 24 Jan 2013

Ben R. Marshall

Massey University - School of Economics and Finance

Nhut H. Nguyen

Massey University

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance

Date Written: 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.

Keywords: Arbitrage, Pairs Trading, ETF

JEL Classification: G1, G14

Suggested Citation

Marshall, Ben R. and Nguyen, Nhut H. and Visaltanachoti, Nuttawat, ETF Arbitrage: Intraday Evidence (November 16, 2010). Available at SSRN: https://ssrn.com/abstract=1709599 or http://dx.doi.org/10.2139/ssrn.1709599

Ben R. Marshall (Contact Author)

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 30974
New Zealand
64 6 350 5799 (Phone)
64 6 350 5651 (Fax)

Nhut Hoang Nguyen

Massey University ( email )

New Zealand

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance ( email )

School of Economics and Finance
Private Bag 102904, NSMC
Auckland
New Zealand
64 9 414 0800 (43169) (Phone)
64 9 441 8177 (Fax)

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