IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2603.05862.html

Impact of arbitrage between leveraged ETF and futures on market liquidity during market crash

Author

Listed:
  • Ryuki Hayase
  • Takanobu Mizuta
  • Isao Yagi

Abstract

Leveraged ETFs (L-ETFs) are exchange-traded funds that achieve price movements several times greater than an index by holding index-linked futures such as Nikkei Stock Average Index futures. It is known that when the price of an L-ETF falls, the L-ETF uses the liquidity of futures to limit the decline through arbitrage trading. Conversely, when the price of a futures contract falls, the futures contract uses the liquidity of the L-ETF to limit its decline. However, the impact of arbitrage trading on the liquidity of these markets has been little studied. Therefore, the present study used artificial market simulations to investigate how the liquidity (Volume, SellDepth, BuyDepth, Tightness) of both markets changes when prices plummet in either (i.e., the L-ETF or futures market), depending on the presence or absence of arbitrage trading. As a result, it was found that when erroneous orders occur in the L-ETF market, the existence of arbitrage trading causes liquidity to be supplied from the futures market to the L-ETF market in terms of SellDepth and Tightness. When erroneous orders occur in the futures market, the existence of arbitrage trading causes liquidity to be supplied from the L-ETF market to the futures market in terms of SellDepth and Tightness, and liquidity to be supplied from the futures market to the L-ETF market in terms of Volume. We also analyzed the internal market mechanisms that led to these results.

Suggested Citation

  • Ryuki Hayase & Takanobu Mizuta & Isao Yagi, 2026. "Impact of arbitrage between leveraged ETF and futures on market liquidity during market crash," Papers 2603.05862, arXiv.org.
    • Handle: RePEc:arx:papers:2603.05862
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2603.05862
    File Function: Latest version
    Download Restriction: no
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2603.05862. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.