Faculty Publications

Systematic Limited Arbitrage And The Cross-Section Of Stock Returns: Evidence From Exchange Traded Funds

Document Type

Article

Keywords

Arbitrage risk, Asset pricing, Factor model, Limits of arbitrage, Risk, Systematic

Journal/Book/Conference Title

Journal of Banking and Finance

Volume

70

First Page

118

Last Page

136

Abstract

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.

Department

Department of Finance

Original Publication Date

9-1-2016

DOI of published version

10.1016/j.jbankfin.2016.06.006

Repository

UNI ScholarWorks, Rod Library, University of Northern Iowa

Language

en

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