2009/03/13 by Péter Kondor · 1 citation
Business, Management and Accounting · Economics, Econometrics and Finance · #Arbitrage #Arbitrage pricing theory #Asset (computer security) #Banking stability, regulation, efficiency #Capital asset pricing model #Convergence (economics) #Corporate Finance and Governance #Econometrics #Economics #Financial Markets and Investment Strategies #Financial economics #Index arbitrage #Limits to arbitrage #Macroeconomics #Market liquidity #Monetary economics #Risk arbitrage
paper · doi:10.1111/j.1540-6261.2009.01445.x
openalex publication_date 2009/03/13 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
ABSTRACT I develop an equilibrium model of convergence trading and its impact on asset prices. Arbitrageurs optimally decide how to allocate their limited capital over time. Their activity reduces price discrepancies, but their activity also generates losses with positive probability, even if the trading opportunity is fundamentally riskless. Moreover, prices of identical assets can diverge even if the constraints faced by arbitrageurs are not binding. Occasionally, total losses are large, making arbitrageurs' returns negatively skewed, consistent with the empirical evidence. The model also predicts comovement of arbitrageurs' expected returns and market liquidity.