Wallace, Damien, and Kalev, Petko S. (2024) Arbitrage Opportunities in the EU Stock Markets at the Open Based on Previous-Day US-Domiciled International ETFs. Journal of Beta Investment Strategies, 15 (2). pp. 23-32.

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Abstract

Based on previous-day trading of US-domiciled international ETFs, we examine European ETFs’ underlying constituent stocks at the opening of their home markets for arbitrage opportunities. We find that the value of these ETFs, measured as the change between the ETF’s iNAV at the end of the US trading session and next-day price of the home ETF’s underlying constituent stock at the opening, are positively related. This impact lasts for approximately five minutes at the opening of European markets. Fast traders can explore arbitrage opportunities. The US market, therefore, transmits and drives pricing information to foreign markets, while European markets are relatively efficient in incorporating this information early the next day. Finally, using recently sampled data, we document that the S&P 500 Index and UK stock index are negatively correlated, while all other EU markets show a positive association with the US market. Therefore, the UK stock market provides good diversification opportunities for US investors.

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