PT - JOURNAL ARTICLE AU - Irene Aldridge TI - ETFs, High-Frequency Trading, and Flash Crashes AID - 10.3905/jpm.2016.43.1.017 DP - 2016 Oct 31 TA - The Journal of Portfolio Management PG - 17--28 VI - 43 IP - 1 4099 - https://pm-research.com/content/43/1/17.short 4100 - https://pm-research.com/content/43/1/17.full AB - This article presents a model of distributional properties of returns on financial instruments tied to exchange traded funds (ETFs) via high-frequency statistical arbitrage. As the author’s model shows, the securities subject to an ETF arbitrage exhibit a well-defined behavior, largely dependent on the behavior of other securities comprising the ETF. The model can be used to improve the risk management of long-term portfolios and, in particular, allow hedging of flash crashes. Furthermore, the author shows that in electronic markets that allow high-frequency trading, the intraday downward volatility for the underlying securities constituting an ETF is bounded from below; as a result, it is less extreme than that of securities not included in any ETFs. Also, downward price movements are more extreme in markets that restrict high-frequency trading than in markets in which it is present.TOPICS: Exchange-traded funds and applications, statistical methods