Hysteresis in price efficiency and the economics of slow-moving capital
Journal
Review of Financial Studies
Subject
Finance
Publishing details
Authors / Editors
Dow J;Han J;Sangiorgi F
Biographies
Publication Year
2021
Abstract
Will arbitrage capital flow into markets experiencing shocks, mitigating adverse effects on price efficiency? Not necessarily. In a dynamic model with privately informed capital-constrained arbitrageurs, price efficiency plays a dual role, determining both the profitability of new arbitrage and the ability to close existing positions profitably. An adverse shock to efficiency lengthens arbitrage duration, effectively reducing the amount of arbitrage capital available for new positions. If this falls below a critical mass, arbitrage capital flows out, amplifying the impact on price efficiency. This creates endogenous regimes: temporary shocks can trigger “hysteresis,” a persistent shift in price efficiency.
Keywords
Asymmetric and private information; Mechanism design; Search; Learning; Information and knowledge; Communication; Belief; Unawareness; Expectations; Speculations; Asset pricing; Trading volume; Bond interest rates; Information and market efficiency
Available on ECCH
No