Equilibrium and welfare in markets with financially constrained arbitrageurs
AbstractWe propose a multi-period model in which competitive arbitrageurs exploit discrepancies between the prices of two identical risky assets, traded in segmented markets. Arbitrageurs need to collateralize separately their positions in each asset, and this implies a financial constraint limiting positions as a function of wealth. We derive an equilibrium and study its welfare properties. Allowing arbitrageurs to trade makes all investors better off. Arbitrageurs' positions may not be Pareto optimal, however, in the sense that a change in these positions may make all investors better off. We characterize conditions under which arbitrageurs take excessive or too little risk.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Financial Economics.
Volume (Year): 66 (2002)
Issue (Month): 2-3 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505576
Other versions of this item:
- Gromb, Denis & Vayanos, Dimitri, 2001. "Equilibrium and Welfare in Markets with Financially Constrained Arbitrageurs," CEPR Discussion Papers 3049, C.E.P.R. Discussion Papers.
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
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