The Impact of Arbitrage on Market Liquidity

108 Pages Posted: 20 Jul 2013 Last revised: 8 Oct 2020

See all articles by Dominik Rösch

Dominik Rösch

State University of New York at Buffalo - School of Management; Erasmus University - Rotterdam School of Management

Date Written: September 30, 2020

Abstract

I study how arbitrage affects liquidity by analyzing several billion trades in the AmericanDepositary Receipt (ADR) market from 2001 to 2016. Price deviations persist, on average, for 12 minutes, and mainly arise because of price pressure. Impulse response functions estimated at 1-minute intervals indicate that a positive shock to arbitrage—simultaneous trades of the ADR and the home-market share in the opposite direction—decreases deviations and bid-ask spreads. I confirm these findings by exploiting institutional details that create exogenous variation in the impediments to arbitrage across days. Overall, these results suggest that arbitrage decreases price pressure and provides liquidity

Keywords: arbitrage, liquidity, efficiency, fragmentation, market integration

JEL Classification: G14, G15

Suggested Citation

Rösch, Dominik, The Impact of Arbitrage on Market Liquidity (September 30, 2020). Paris December 2014 Finance Meeting EUROFIDAI - AFFI Paper, Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2295437 or http://dx.doi.org/10.2139/ssrn.2295437

Dominik Rösch (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

HOME PAGE: http://dominikroesch.com

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

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