Liquidity and Arbitrage
AbstractSince arbitrage involves trading, it is potentially impeded by market frictions and costs. We study whether stock market liquidity is related to the efficacy of arbitrage. Specifically, we examine the joint time-series of the NYSE Composite index futures basis and aggregate liquidity on the NYSE for a relatively long time-period, over 3000 trading days, and find that the basis and liquidity are jointly determined. Contemporaneous innovations in the absolute basis and in bid-ask spreads are positively correlated. There is also evidence of two-way Granger causality between short-term absolute bases and effective spreads. Impulse response functions indicate that shocks to the absolute basis are significantly informative in predicting spreads.
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Bibliographic InfoPaper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt9492m2t1.
Date of creation: 08 Nov 2004
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