Comparative Analysis of ETF Arbitrage Strategy in Efficient and Inefficient Markets

Abstract

This paper analyzes the different performance of an ETF arbitrage strategy in efficient and inefficient markets, the markets of the United States and Russia. It would initiate from the ETFs and their importance to the global financial market. Then, the paper introduced what the arbitrage strategy is, and how it works. Then, by comparing the key factors, it classifies efficient market, the U.S. market, and the inefficient market, the Russian market.  In the paper, the S&P 500 ETF represents the U.S. market, and the VanEck Russia ETF (RSX) represents the Russian Market. The paper analyzes the performance in these two markets from 2016 to 2021 and ignores the transaction costs. The paper concluded that the ETF arbitrage strategy performed better in the inefficient market (Russia) compared to the efficient market (U.S.). Limitations are acknowledged in the paper, such as the effect of transaction costs, which would reduce the actual profits and returns, and that the historical market data might not strong enough in predicting the future performance of the market. These would lead to future research and further analysis to enhance the overall effectiveness of the project and make it aligns more closely with the real-world conditions.