Arbitrage Comovement Effect in ETFs
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John J. Shim
- University of Notre Dame
- ARUniversity of Mendoza
- ?University of Notre Dame - Mendoza College of Business
Strategy in a nutshell
Form long–short portfolios of heavily traded U.S. equity ETFs based on arbitrage sensitivity. Go long high-sensitivity ETFs, short low-sensitivity ETFs, and rebalance monthly using value-weighted constituent weights.
Economic rationale
High ETF trading activity distorts prices via arbitrage co-movement, affecting factor exposures. Exploiting these mechanical mispricings allows the strategy to capture returns while highlighting inefficiencies at the individual security level.
Backtest performance
Annualised return8.07%
Volatility8.8%
Sharpe ratio0.92