We study arbitrage in ETFs holding illiquid corporate bonds, focusing on authorized participants (APs) and their … sheet in both roles. We find that bond market illiquidity limits ETF arbitrage. Using novel AP-level balance sheet data, we … further find that large bond flow shocks to AP balance sheets also limit ETF arbitrage, leading to persistent relative …

Market liquidity is expected to facilitate arbitrage, which in turn should affect the liquidity of the assets traded by … that liquidity is an important determinant of the efficacy of the ETF arbitrage. For less liquid bond ETFs, Granger …-causality tests and impulse responses suggest that this relationship is stronger and more persistent, and liquidity spillovers are …

participants are liquidity-constrained, prices become less informative. This creates an adverse selection problem, decreasing the … supply capital to support the price. In normal times, arbitrage capital can "multiply" itself by making uninformed capital …

conflict is small, liquidity mismatch reduces the arbitrage capacity of ETFs; as the conflict increases, an inventory …A natural liquidity mismatch emerges when liquid exchange traded funds (ETFs) hold relatively illiquid assets. We … provide a theory and empirical evidence showing that this liquidity mismatch can reduce market efficiency and increase the …

During times of market stress, arbitrage capital cannot be timely deployed, and assets trade away from fundamentals …

: the deterioration of bond market liquidity, the increased bond specialness on the repurchase agreement market, and the …

that algorithmic traders withdrew liquidity and generated uninformative volatility in Swiss franc currency pairs, while …

: the deterioration of bond market liquidity, the increased bond specialness on the repurchase agreement market, and the …

We examine the impact of ETF ownership on the commonality in liquidity of underlying stocks, while controlling for …-pair level indicate that ETF ownership significantly increases commonality. We show that greater arbitrage activities are … of Russell indexes, and ETF trading halts, to establish the causal effect of ETF ownership and the arbitrage mechanism …

I model the behavior of an arbitrageur who is exposed to time-varying liquidity. She is averse to liquidating her … position in a bad liquidity state. Therefore, she limits her trading in stocks having high variation in liquidity. In … equilibrium, these stocks experience severe mispricing due to reduced arbitrage activity. Consistent with the model, in empirical …