Bond ETF Arbitrage Strategies and Daily Cash Flow

Posted: 4 Apr 2017 Last revised: 30 Aug 2017

See all articles by Jon A. Fulkerson

Jon A. Fulkerson

University of Dayton

Susan D. Jordan

University of Kentucky - Finance

Denver Travis

Loyola University New Orleans - College of Business

Date Written: March 8, 2017

Abstract

Bond ETFs trading at a premium (discount) to NAV experience more creations (redemptions) than those trading at parity. When these transactions occur, subsequent returns partially offset the premium or discount. These results suggest that arbitrage trading between the underlying bonds and the ETFs has a significant impact on market returns. However, in the absence of cash flow, premiums and discounts persist. We consider market factors that discourage arbitrage trading around premiums and discounts, and find these anomalies persist in part due to costs and uncertainty in the secondary market.

Suggested Citation

Fulkerson, Jon A. and Jordan, Susan D. and Travis, Denver, Bond ETF Arbitrage Strategies and Daily Cash Flow (March 8, 2017). Journal of Fixed Income, Volume 27, Number 1, Summer 2017, Pages 49-65., Available at SSRN: https://ssrn.com/abstract=2944771

Jon A. Fulkerson

University of Dayton ( email )

300 College Park
Dayton, OH 45469
United States

Susan D. Jordan

University of Kentucky - Finance ( email )

Gatton College of Business & Economics
University of Kentucky
Lexington, KY 40506-0034
United States
859-257-1626 (Phone)

Denver Travis (Contact Author)

Loyola University New Orleans - College of Business

6363 St. Charles Avenue
New Orleans, LA 70118
United States

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