. We show that the dynamics of arbitrage capital are self-correcting: following a shock that depletes capital, returns … respect to arbitrage capital. Diversification of arbitrageurs across markets induces contagion, but generally lowers …

This paper shows how arbitrage activity contributes to the convergence of liquidity across markets. Based on simple … arbitrage arguments, I show how arbitrageurs' market and limit orders create co-movement across markets of bid prices, ask … prices, and bid-ask spreads. Empirically, I document how the intensity of arbitrage activity increases the co-movement of …

with the index. Arbitrage activity is a necessary component in minimizing the price discrepancy between ETFs and the … underlying securities. During turbulent market episodes, however, arbitrage is limited and ETF prices diverge from those of the …

limits to arbitrage, thereby impeding efficiency in the market. …