Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/275070 
Year of Publication: 
2022
Citation: 
[Journal:] Journal of Risk and Financial Management [ISSN:] 1911-8074 [Volume:] 15 [Issue:] 12 [Article No.:] 593 [Year:] 2022 [Pages:] 1-17
Publisher: 
MDPI, Basel
Abstract: 
Arbitrage and liquidity are interrelated. Liquidity facilitates arbitrageurs' trading on deviations from the law of one price. However, whether arbitrage opportunity leads to an increase or decrease in liquidity depends on the cause of the deviation. A demand shock leads to greater liquidity, while asymmetric information is toxic to liquidity. We examine how arbitrage and liquidity influence each other in the world's largest platinum futures markets on exchanges in New York and Tokyo. The markets provide an interesting institutional setting because the futures are based on an identical underlying commodity but exhibit different liquidity characteristics both intraday and over their lifespans. Using intraday data, we find that deviation in currency-adjusted futures prices leads, on average, to an immediate increase in liquidity, suggesting that demand shocks are the dominant driver of arbitrage opportunities. Less actively traded futures experience a greater liquidity effect. Arbitrageurs improve liquidity in both New York and Tokyo by acting as discretionary liquidity traders and cross-sectional market-makers.
Subjects: 
liquidity
efficiency
arbitrage
futures
market integration
platinum
JEL: 
G13
G14
G15
Q02
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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