IDEAS home Printed from https://ideas.repec.org/p/udc/wpaper/wp519.html
   My bibliography  Save this paper

Does the Diversity and Solvency of Authorized Participants Matter for Bond ETF Arbitrage? Evidence from the Dash for Cash Episode

Author

Listed:
  • Claudio E. Raddatz K.

Abstract

Authorized participants’ (APs) arbitrage in primary markets for ETF shares plays a key role in limiting dislocation in ETF prices. This paper builds a novel dataset of detailed US bond ETF-AP relationships and shows that high AP leverage played a significant role in weakening this arbitrage during the dash-for-cash episode of March 2020. The strength of the arbitrage relationship linking price signals to primary market activity weakened by 77 percent in ETFs related to more leveraged APs versus 64 percent for ETFs linked to less leveraged APs. This effect was particularly strong among those ETFs focusing on less liquid asset classes, relying on APs engaging in high-frequency trading strategies, and unrelated to banks and bank holding companies. Policy announcements by the Federal Reserve did not have had a strong impact in restoring arbitrage strength. AP leverage constraints operated in parallel to constraints faced by lead-market makers in secondary ETF markets, which were more closely related to regulatory capital limits.

Suggested Citation

  • Claudio E. Raddatz K., 2021. "Does the Diversity and Solvency of Authorized Participants Matter for Bond ETF Arbitrage? Evidence from the Dash for Cash Episode," Working Papers wp519, University of Chile, Department of Economics.
    • Handle: RePEc:udc:wpaper:wp519
    as

    Download full text from publisher

    File URL: https://econ.uchile.cl/es/publicacion/Does-the-Diversity-and-Solvency-of-Authorized-Participants-Matter-for-Bond-ETF-Arbitrage
    Download Restriction: no
    ---><---

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:udc:wpaper:wp519. 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.

    We have no bibliographic references for this item. You can help adding them by using 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: Mohit Karnani (email available below). General contact details of provider: https://edirc.repec.org/data/deuclcl.html .

    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.