> Liquidity premium isn't relevant here. The concept of the liquidity premium explains the differences in prices of otherwise identical securities as a function of their liquidity. What you're thinking of is called slippage, the difference between your target price and realized price for a trade.

Those are the same thing. An illiquid asset cannot be liquidated without slippage - that's why there's a liquidity premium.

> When running an ETF arbitrage strategy, your concern is not explaining the price of the relevant securities. However, you do care whether you can enter and exit positions profitably. Slippage models are highly nontrivial.

Again...slippage is the thing caused by a lack of liquidity.