IDEAS home Printed from https://ideas.repec.org/a/eee/jfinec/v141y2021i3p1078-1095.html
   My bibliography  Save this article

Intraday arbitrage between ETFs and their underlying portfolios

Author

Listed:
  • Box, Travis
  • Davis, Ryan
  • Evans, Richard
  • Lynch, Andrew

Abstract

Prior research suggests that nonfundamental exchange-traded fund (ETF) price shocks are transmitted to their portfolios through an arbitrage mechanism. We test this proposition by examining minute-by-minute returns and order imbalances but find little evidence that ETF trading impacts underlying returns. Specifically, panel vector autoregression shows that ETF returns do not lead portfolio prices. Instead, arbitrage opportunities arise from order imbalances and price movements in the underlying securities and are subsequently eliminated by ETF quote adjustments, rather than arbitrage trading. We extend our analysis to a daily frequency but still find little relation between ETF trading and constituent security prices.

Suggested Citation

  • Box, Travis & Davis, Ryan & Evans, Richard & Lynch, Andrew, 2021. "Intraday arbitrage between ETFs and their underlying portfolios," Journal of Financial Economics, Elsevier, vol. 141(3), pages 1078-1095.
    • Handle: RePEc:eee:jfinec:v:141:y:2021:i:3:p:1078-1095
    DOI: 10.1016/j.jfineco.2021.04.023
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X21001537
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfineco.2021.04.023?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hamilton, James D, 1985. "Uncovering Financial Market Expectations of Inflation," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1224-1241, December.
    2. Koijen, Ralph S.J. & Lustig, Hanno & Van Nieuwerburgh, Stijn, 2017. "The cross-section and time series of stock and bond returns," Journal of Monetary Economics, Elsevier, vol. 88(C), pages 50-69.
    3. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-1395, November.
    4. Markus S. Broman & Pauline Shum, 2018. "Relative Liquidity, Fund Flows and Short†Term Demand: Evidence from Exchange†Traded Funds," The Financial Review, Eastern Finance Association, vol. 53(1), pages 87-115, February.
    5. Gregory R. Duffee, 2018. "Expected Inflation and Other Determinants of Treasury Yields," Journal of Finance, American Finance Association, vol. 73(5), pages 2139-2180, October.
    6. Michael R. M. Abrigo & Inessa Love, 2016. "Estimation of panel vector autoregression in Stata," Stata Journal, StataCorp LP, vol. 16(3), pages 778-804, September.
    7. Marshall, Ben R. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat, 2013. "ETF arbitrage: Intraday evidence," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3486-3498.
    8. Doron Israeli & Charles M. C. Lee & Suhas A. Sridharan, 2017. "Is there a dark side to exchange traded funds? An information perspective," Review of Accounting Studies, Springer, vol. 22(3), pages 1048-1083, September.
    9. Itzhak Ben‐David & Francesco Franzoni & Rabih Moussawi, 2018. "Do ETFs Increase Volatility?," Journal of Finance, American Finance Association, vol. 73(6), pages 2471-2535, December.
    10. Zhi Da & Sophie Shive, 2018. "Exchange traded funds and asset return correlations," European Financial Management, European Financial Management Association, vol. 24(1), pages 136-168, January.
    11. Lee, Jongsub & Naranjo, Andy & Velioglu, Guner, 2018. "When do CDS spreads lead? Rating events, private entities, and firm-specific information flows," Journal of Financial Economics, Elsevier, vol. 130(3), pages 556-578.
    12. Travis Box & Ryan L. Davis & Kathleen P. Fuller, 2019. "ETF Competition and Market Quality," Financial Management, Financial Management Association International, vol. 48(3), pages 873-916, September.
    13. Malamud, Semyon, 2016. "A Dynamic Equilibrium Model of ETFs," CEPR Discussion Papers 11469, C.E.P.R. Discussion Papers.
    14. Suzanne S. Lee & Per A. Mykland, 2008. "Jumps in Financial Markets: A New Nonparametric Test and Jump Dynamics," The Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2535-2563, November.
    15. Andrews, Donald W. K. & Lu, Biao, 2001. "Consistent model and moment selection procedures for GMM estimation with application to dynamic panel data models," Journal of Econometrics, Elsevier, vol. 101(1), pages 123-164, March.
    16. Hilscher, Jens & Pollet, Joshua M. & Wilson, Mungo, 2015. "Are Credit Default Swaps a Sideshow? Evidence That Information Flows from Equity to CDS Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(3), pages 543-567, June.
    17. Charupat, Narat & Miu, Peter, 2011. "The pricing and performance of leveraged exchange-traded funds," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 966-977, April.
    18. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October.
    19. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    20. Burton Hollifield & Artem Neklyudov & Chester Spatt, 2017. "Bid-Ask Spreads, Trading Networks, and the Pricing of Securitizations," The Review of Financial Studies, Society for Financial Studies, vol. 30(9), pages 3048-3085.
    21. Jonathan Brogaard & Terrence Hendershott & Ryan Riordan, 2019. "Price Discovery without Trading: Evidence from Limit Orders," Journal of Finance, American Finance Association, vol. 74(4), pages 1621-1658, August.
    22. Broman, Markus S., 2016. "Liquidity, style investing and excess comovement of exchange-traded fund returns," Journal of Financial Markets, Elsevier, vol. 30(C), pages 27-53.
    23. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    24. Ivanov, Stoyu I. & Jones, Frank J. & Zaima, Janis K., 2013. "Analysis of DJIA, S&P 500, S&P 400, NASDAQ 100 and Russell 2000 ETFs and their influence on price discovery," Global Finance Journal, Elsevier, vol. 24(3), pages 171-187.
    25. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 190-210, May.
    26. Joel Hasbrouck, 2003. "Intraday Price Formation in U.S. Equity Index Markets," Journal of Finance, American Finance Association, vol. 58(6), pages 2375-2400, December.
    27. Michael R.M. Abrigo & Inessa Love, 2016. "Estimation of Panel Vector Autoregression in Stata: a Package of Programs," Working Papers 201602, University of Hawaii at Manoa, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yuan Fu & Christine Jiang, 2023. "The effect of liquidity and arbitrage on the price efficiency of Chinese ETFs," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(4), pages 1103-1140, December.
    2. Vassilios Babalos & Elie Bouri & Rangan Gupta, 2024. "Does the Introduction of US Spot Bitcoin ETFs Affect Spot Returns and Volatility of Major Cryptocurrencies?," Working Papers 202416, University of Pretoria, Department of Economics.
    3. Alexandre Aidov & Olesya Lobanova, 2021. "Volatility and Depth in Commodity and FX Futures Markets," JRFM, MDPI, vol. 14(11), pages 1-16, November.
    4. An, Yu & Benetton, Matteo & Song, Yang, 2023. "Index providers: Whales behind the scenes of ETFs," Journal of Financial Economics, Elsevier, vol. 149(3), pages 407-433.
    5. Duffy, John & Friedman, Dan & Rabanal, Jean Paul & Rud, Olga, 2022. "The impact of ETF index inclusion on stock prices," UiS Working Papers in Economics and Finance 2022/2, University of Stavanger.
    6. Xin Guan & Takanobu Mizuta & Isao Yagi, 2024. "Impact of arbitrage trading between an ETF and its underlying assets on market liquidity of their markets using an agent-based simulation," Journal of Computational Social Science, Springer, vol. 7(3), pages 2839-2870, December.
    7. Zhou, Dong-hai & Liu, Xiao-xing, 2024. "Does systemic risk in the fund markets predict future economic downturns?," International Review of Financial Analysis, Elsevier, vol. 92(C).
    8. Philippe van der Beck & Jean-Philippe Bouchaud & Dario Villamaina, 2024. "Ponzi Funds," Papers 2405.12768, arXiv.org.
    9. Chen, Guanhua & Liu, Xiangli & Liu, Xiao & Zhao, Zhihua, 2024. "ETF ownership and stock pricing efficiency: The role of ETF arbitrage," Finance Research Letters, Elsevier, vol. 62(PA).
    10. Jegadeesh, Narasimhan & Wu, Yanbin, 2022. "Closing auctions: Nasdaq versus NYSE," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1120-1139.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hertweck, Matthias & Brey, Bjoern, 2017. "The Persistent Effects of Monsoon Rainfall Shocks in India: A Nonlinear VAR Approach," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168256, Verein für Socialpolitik / German Economic Association.
    2. Sigmund, Michael & Ferstl, Robert, 2021. "Panel vector autoregression in R with the package panelvar," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 693-720.
    3. Björn Brey & Matthias S. Hertweck, 2023. "The dynamic effects of monsoon rainfall shocks on agricultural yield, wages, and food prices in India," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(3), pages 616-654, July.
    4. Marshall, Emily C. & Saunoris, James & Solis-Garcia, Mario & Do, Trang, 2023. "Measuring the size and dynamics of U.S. state-level shadow economies using a dynamic general equilibrium model with trends," Journal of Macroeconomics, Elsevier, vol. 75(C).
    5. Carlos Alberto Piscarreta Pinto Ferreira, 2021. "Does Public Debt Ownership Structure Matter for a Borrowing Country?," Working Papers REM 2021/0190, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    6. Lin, Woon Leong & Law, Siong Hook & Ho, Jo Ann & Sambasivan, Murali, 2019. "The causality direction of the corporate social responsibility – Corporate financial performance Nexus: Application of Panel Vector Autoregression approach," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 401-418.
    7. Kacou Yves Thierry Kacou & Yacouba Kassouri & Andrew Adewale Alola & Mehmet Altuntaş, 2022. "Examining the sustainable development approach of migrants' remittances and financial development in sub‐Saharan African countries," Sustainable Development, John Wiley & Sons, Ltd., vol. 30(5), pages 804-816, October.
    8. Kumeka, Terver Theophilus & Uzoma-Nwosu, Damian Chidozie & David-Wayas, Maria Onyinye, 2022. "The effects of COVID-19 on the interrelationship among oil prices, stock prices and exchange rates in selected oil exporting economies," Resources Policy, Elsevier, vol. 77(C).
    9. Joan Costa-Font & Cristina Vilaplana-Prieto, 2023. "‘Investing’ in care for old age? An examination of long-term care expenditure dynamics and its spillovers," Empirical Economics, Springer, vol. 64(1), pages 1-30, January.
    10. Al-Jahwari, Salim Ahmed Said, 2021. "Does the Twin-Deficits doctrine apply to the Gulf Cooperation Council? A dynamic panel VAR-X model approach," MPRA Paper 111232, University Library of Munich, Germany.
    11. Kannyiri Banyen & Nicholas Biekpe, 2020. "Financial integration, competition and bank efficiency: evidence from Africa’s sub-regional markets," Economic Change and Restructuring, Springer, vol. 53(4), pages 495-518, November.
    12. Abebe Hailemariam & Tutsirai Sakutukwa & Ratbek Dzhumashev, 2021. "Long-term determinants of income inequality: evidence from panel data over 1870–2016," Empirical Economics, Springer, vol. 61(4), pages 1935-1958, October.
    13. Kounetas, Kostas & Napolitano, Oreste & Stavropoulos, Spyridon & Burger, Martijn, 2018. "European Regional Productive Performance under a Metafrontier Framework. The role of patents and human capital on technology gap?," MPRA Paper 88957, University Library of Munich, Germany, revised 17 Jul 2018.
    14. Xu, Liao & Yin, Xiangkang & Zhao, Jing, 2019. "The sidedness and informativeness of ETF trading and the market efficiency of their underlying indexes," Pacific-Basin Finance Journal, Elsevier, vol. 58(C).
    15. Mohamed Traoré, 2018. "Government spending and inclusive growth in sub-Saharan Africa: A panel VAR analysis," CERDI Working papers hal-01940506, HAL.
    16. Baldwin, Kenneth & Alhalboni, Maryam, 2023. "A value-based measure of market power for the participatory deposits of Islamic banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 87(C).
    17. Ryan H. Murphy & Colin O’Reilly, 2019. "Applying panel vector autoregression to institutions, human capital, and output," Empirical Economics, Springer, vol. 57(5), pages 1633-1652, November.
    18. López-Mendoza, Héctor & González-Álvarez, María A. & Montañés, Antonio, 2024. "Assessing the effectiveness of international government responses to the COVID-19 pandemic," Economics & Human Biology, Elsevier, vol. 52(C).
    19. César Salinas Depaz & Wilder Pérez Condor & Ricardo Najarro Chuchón, 2019. "Determinantes de la Diversificación Exportadora: Enfoque Bayesiano," Revista de Análisis Económico y Financiero, Universidad de San Martín de Porres, vol. 1(02), pages 23-35.
    20. Alexandra-Anca Purcel, 2020. "Developing states and the green challenge. A dynamic approach," Post-Print hal-03182341, HAL.

    More about this item

    Keywords

    Exchange-traded funds; ETFs; Limits to arbitrage; Liquidity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:141:y:2021:i:3:p:1078-1095. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.