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Title: Stability Effects of Arbitrage in Exchange Traded Funds: An Agent-Based Model
An index-based exchange traded fund (ETF) with underlying se- curities that trade on the same market creates potential opportu- nities for arbitrage between price deviations in the ETF and the corresponding index. We examine whether ETF arbitrage trans- mits small volatility events, termed mini flash crashes, from one of its underlying symbols to another. We address this question in an agent-based, simulated market where agents can trade an ETF and its two underlying symbols. We explore multiple market configurations with active and inactive ETF arbitrageurs. Through empirical game-theoretic analysis, we find that when arbitrageurs actively trade, background traders’ surplus increases because of the increased liquidity. Arbitrage helps the ETF more accurately track the index. We also observe that when one symbol experiences a mini flash crash, arbitrage transmits a price change in the opposite direction to the other symbol. The size of the mini flash crash de- pends more on the market configuration than the arbitrageurs, but the recovery of the mini flash crash is faster when arbitrageurs are present.  more » « less
Award ID(s):
1741026
NSF-PAR ID:
10311492
Author(s) / Creator(s):
; ; ;
Date Published:
Journal Name:
2nd ACM International Conference on AI in Finance (ICAIF’21)
Format(s):
Medium: X
Sponsoring Org:
National Science Foundation
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