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Annals of Finance

, Volume 10, Issue 3, pp 457–480 | Cite as

The determinants of a cross market arbitrage opportunity: theory and evidence for the European bond market

  • Marcelo Perlin
  • Alfonso Dufour
  • Chris Brooks
Research Article
  • 369 Downloads

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

G15 G17 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.Federal University of Rio Grande do Sul (Brazil)Porto AlegreBrazil
  2. 2.ICMA Centre, Henley Business School, University of Reading (UK)ReadingUK

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