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Limited Arbitrage in Equity Markets

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Author Info
Mark Mitchell (Harvard University,)
Todd Pulvino (Northwestern University)
Erik Stafford (Harvard University,)

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Abstract

We examine 82 situations where the market value of a company is less than its subsidiary. These situations imply arbitrage opportunities, providing an ideal setting to study the risks and market frictions that prevent arbitrageurs from immediately forcing prices to fundamental values. For 30 percent of the sample, the link between the parent and its subsidiary is severed before the relative value discrepancy is corrected. Furthermore, returns to a specialized arbitrageur would be 50 percent larger if the path to convergence was smooth rather than as observed. Uncertainty about the distribution of returns and characteristics of the risks limits arbitrage. Copyright The American Finance Association 2002.

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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 57 (2002)
Issue (Month): 2 (04)
Pages: 551-584
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Handle: RePEc:bla:jfinan:v:57:y:2002:i:2:p:551-584

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  1. Gagnon, Louis & Karolyi, G. Andrew, 2004. "Multi-market Trading and Arbitrage," Working Paper Series 2004-9, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  2. John R. Ezzell & James A. Miles & J. Harold Mulherin, 2001. "Is there Really a When-Issued Premium?," Claremont Colleges Working Papers 2001-34, Claremont Colleges. [Downloadable!]
  3. Pekka Hietala & Steven N. Kaplan & David T. Robinson, 2002. "What is the Price of Hubris? Using Takeover Battles to Infer Overpayments and Synergies," NBER Working Papers 9264, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2005. "The joint dynamics of liquidity, returns, and volatility across small and large firms," Staff Reports 207, Federal Reserve Bank of New York. [Downloadable!]
  5. Harrison Hong & Jose Scheinkman & Wei Xiong, 2005. "Asset Float and Speculative Bubbles," Levine's Bibliography 122247000000000861, UCLA Department of Economics. [Downloadable!]
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  6. John Y. Campbell & Tuomo Vuolteenaho, 2003. "Bad Beta, Good Beta," NBER Working Papers 9509, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Joshua D. Coval & Erik Stafford, 2005. "Asset Fire Sales (and Purchases) in Equity Markets," NBER Working Papers 11357, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Owen A. Lamont & Richard H. Thaler, . "Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs," CRSP working papers 528, Center for Research in Security Prices, Graduate School of Business, University of Chicago. [Downloadable!]
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  9. Owen Lamont, 2004. "Go Down Fighting: Short Sellers vs. Firms," NBER Working Papers 10659, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Flynn, Sean Masaki, 2003. "Limited Arbitrage, Segmentation, and Investor Heterogeneity: Why the Law of One Price So Often Fails," Vassar College Department of Economics Working Paper Series 56, Vassar College Department of Economics. [Downloadable!]
  11. Nicholas Barberis & Ming Huang, 2007. "Stocks as Lotteries: The Implications of Probability Weighting for Security Prices," NBER Working Papers 12936, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. John H. Cochrane, 2002. "Stocks as Money: Convenience Yield and the Tech-Stock Bubble," NBER Working Papers 8987, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. J. Scheinkman & W. Xiong, 2002. "Overconfidence, Short-Sale Constraints and Bubbles," Princeton Economic Theory Working Papers 98734966f1c1a57373801367f, UCLA Department of Economics. [Downloadable!]
  14. Jianping Mei & Jose Scheinkman & Wei Xiong, 2005. "Speculative Trading and Stock Prices: An Analysis of Chinese A-B Share Premia," Levine's Bibliography 122247000000000867, UCLA Department of Economics. [Downloadable!]
  15. Michael R. Powers & David M. Schizer & Martin Shubik, 2003. "Market Bubbles and Wasteful Avoidance: Tax and Regulatory Constraints on Short Sales," Cowles Foundation Discussion Papers 1413, Cowles Foundation, Yale University. [Downloadable!]
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  16. Eli Ofek & Matthew Richardson & Robert F. Whitelaw, 2003. "Limited Arbitrage and Short Sales Restrictions: Evidence from the Options Markets," NBER Working Papers 9423, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Raj Aggarwal, 2004. "Persistent Puzzles in International Finance and Economics," The Economic and Social Review, Economic and Social Studies, vol. 35(3), pages 241-250. [Downloadable!]
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