Systematic limited arbitrage and the cross-section of stock returns: Evidence from exchange traded funds
Arbitrage risk, Asset pricing, Factor model, Limits of arbitrage, Risk, Systematic
Journal of Banking and Finance
We propose a parsimonious, comprehensive proxy for innovations in limited arbitrage: innovations in ETFs’ premium. Consistent with a common component, we confirm limited arbitrage factors, LAFs, constructed from ETFs’ premium innovations spanning four asset classes are correlated. Further, we find that equity LAFs are negatively priced in the cross-section of stock returns. Our pricing tests also confirm that LAFs provide pricing information beyond well-known limits of arbitrage: illiquidity and idiosyncratic volatility. Overall, our findings suggest that limited arbitrage risk is priced and LAF is a relevant risk-factor.
Original Publication Date
DOI of published version
UNI ScholarWorks, Rod Library, University of Northern Iowa
DeLisle, R. Jared; McTier, Brian C.; and Smedema, Adam R., "Systematic limited arbitrage and the cross-section of stock returns: Evidence from exchange traded funds" (2016). Faculty Publications. 1039.