The Determinants of a Cross Market Arbitrage Opportunity: Theory and Evidence for the European Bond Market

30 Pages Posted: 7 Jun 2010 Last revised: 26 Jan 2015

See all articles by Marcelo Perlin

Marcelo Perlin

Escola de Administração - UFRGS

Alfonso Dufour

ICMA Centre, Henley Business School, University of Reading

Chris Brooks

University of Bristol - School of Economics, Finance and Management

Date Written: August 15, 2012

Abstract

This paper examines the determinants of cross-platform arbitrage profits. We develop a structural model that enables us to decompose the likelihood of an arbitrage opportunity into three distinct factors: the fixed cost to trade the opportunity, the level at which one of the platforms delays a price update and the impact of the order flow on the quoted prices (inventory and asymmetric information effects. We then investigate the predictions from the theoretical model for the European Bond market with the estimation of a probit model. Our main finding is that the results found in the empirical part corroborate strongly the predictions from the structural model. The event of a cross market arbitrage opportunity has a certain degree of predictability where an optimal ex ante scenario is represented by a low level of spreads on both platforms, a time of the day close to the end of trading hours and a high volume of trade.

Keywords: Arbitrage Opportunities, Negative Spreads, Market Microstructure, Market Efficiency

JEL Classification: C3, D4, D8, G12

Suggested Citation

Perlin, Marcelo and Dufour, Alfonso and Brooks, Chris, The Determinants of a Cross Market Arbitrage Opportunity: Theory and Evidence for the European Bond Market (August 15, 2012). Available at SSRN: https://ssrn.com/abstract=1621718 or http://dx.doi.org/10.2139/ssrn.1621718

Marcelo Perlin (Contact Author)

Escola de Administração - UFRGS ( email )

Porto-Alegre RS
Brazil

HOME PAGE: http://sites.google.com/site/marceloperlin/

Alfonso Dufour

ICMA Centre, Henley Business School, University of Reading ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Chris Brooks

University of Bristol - School of Economics, Finance and Management ( email )

School of Accounting and Finance
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
383
Abstract Views
2,695
Rank
141,890
PlumX Metrics