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The determinants of a cross market arbitrage opportunity: theory and evidence for the European bond market

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  • Marcelo Perlin
  • Alfonso Dufour
  • Chris Brooks

Abstract

This paper examines the determinants of cross-platform arbitrage profits. We develop a structural model that enables us to decompose the likelihood of an arbitrage opportunity into three distinct factors: the fixed cost to trade the opportunity, the level at which one of the platforms delays a price update and the impact of the order flow on the quoted prices (inventory and asymmetric information effects). We then investigate the predictions from the theoretical model for the European Bond market with the estimation of a probit model. Our main finding is that the results found in the empirical part corroborate strongly the predictions from the structural model. The event of a cross market arbitrage opportunity has a certain degree of predictability where an optimal ex ante scenario is represented by a low level of spreads on both platforms, a time of the day close to the end of trading hours and a high volume of trade. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Marcelo Perlin & Alfonso Dufour & Chris Brooks, 2014. "The determinants of a cross market arbitrage opportunity: theory and evidence for the European bond market," Annals of Finance, Springer, vol. 10(3), pages 457-480, August.
    • Handle: RePEc:kap:annfin:v:10:y:2014:i:3:p:457-480
    DOI: 10.1007/s10436-013-0242-5
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    References listed on IDEAS

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    5. Gregory Boadu-Sebbe, 2022. "Effect of Exchange-Traded Funds Arbitrage Transactions on their Underlying Holdings," CERGE-EI Working Papers wp738, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

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    More about this item

    Keywords

    Arbitrage opportunities; Negative spreads; Market microstructure; Market efficiency; G15; G17;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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