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                                                                                    Working Paper
                                                                                
                                            Arbitrage and Liquidity: Evidence from a Panel of Exchange Traded Funds
                                        
                                        
                                        
                                        
                                                                                    
                                                                                                    Market liquidity is expected to facilitate arbitrage, which in turn should affect the liquidity of the assets traded by arbitrageurs.  We study this relationship using a unique dataset of equity and bond ETFs compiled from big trade-level data.  We find 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 observed from portfolio constituents to ETF shares.  Our results inform the design of synthetic ...