Deliberate Limits to Arbitrage
Subject
Finance
Publishing details
IFA Working Paper
Publication Year
2012
Abstract
This paper develops a model in which arbitrageurs are collectively unconstrained. Yet, they may prefer to incur individual limits of arbitrage rather than use their combined resources to capture every available arbitrage opportunity. Such deliberate limits to arbitrage arise because the communication of an arbitrage position reveals the idea underlying it. The absence of property rights on arbitrage ideas implies that this creates future competition. We let arbitrage opportunities differ along the ease with which they can be identified and along the speed at which they mature. We find that such deliberate limits to arbitrage arise for arbitrage opportunities that are neither too slow nor too quick to mature. The range of maturities for which arbitrage is limited increases when arbitrage opportunities are easier to find. Our results thus restrict the set of arbitrage trades that are likely to exist in the market.
Keywords
limits of arbitrage
Series
IFA Working Paper
Available on ECCH
No
