Intraday Arbitrage Between ETFs and their Underlying Portfolios

73 Pages Posted: 30 Jan 2019 Last revised: 15 Feb 2020

See all articles by Travis Box

Travis Box

Clemson University

Ryan Davis

University of Alabama at Birmingham

Richard B. Evans

University of Virginia - Darden School of Business

Andrew A Lynch

University of Arkansas - Sam M. Walton College of Business

Date Written: February 13, 2020

Abstract

Prior research suggests that ETF arbitrage affects the market quality of underlying securities. We directly test this proposition by examining minute-by-minute returns and order imbalances, but find little evidence that trading in ETFs impacts the underlying. Panel vector autoregression shows ETF returns largely follow the underlying returns. We also find that mispricing events are preceded by underlying price and order imbalance shocks, corrected by ETF quote adjustments unrelated to order imbalance, inconsistent with an arbitrage explanation. Extending our analysis to a daily frequency also reveals little to no relation between ETFs and the market quality of their constituent securities.

Keywords: Exchange traded funds (ETFs), limits to arbitrage, liquidity

JEL Classification: G12, G14

Suggested Citation

Box, Travis and Davis, Ryan and Evans, Richard B. and Lynch, Andrew A, Intraday Arbitrage Between ETFs and their Underlying Portfolios (February 13, 2020). Available at SSRN: https://ssrn.com/abstract=3322400 or http://dx.doi.org/10.2139/ssrn.3322400

Travis Box (Contact Author)

Clemson University ( email )

101 Sikes Ave
Clemson, SC 29634
United States

Ryan Davis

University of Alabama at Birmingham ( email )

Birmingham, AL 35294
United States

Richard B. Evans

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4030 (Phone)
434-243-7680 (Fax)

HOME PAGE: http://faculty.darden.virginia.edu/evansr/

Andrew A Lynch

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

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