Limits to arbitrage when market participation is restricted
AbstractThere is an extensive litarature claiming that it is often difficult to make use of arbitrage opportunities in financial markets. This paper provides a new reason why existing arbitrage opportunities might not be seized. We consider a world with short-lived securities, no short-selling constraints and no transaction costs. We show that to exploit all existing arbitrage opportunities, traders should pay attention to all financial markets simultaneously. It gives a general result stating that failure to do so will leave some arbitrage opportunities unexploited with probability one.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Mathematical Economics.
Volume (Year): 42 (2006)
Issue (Month): 4-5 (August)
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Web page: http://www.elsevier.com/locate/jmateco
Other versions of this item:
- Hens,Thorsten & Herings,P. Jean-Jacques & Predtetchinskii,Arkadi, 2003. "Limits to Arbitrage when Market Participation Is Restricted," Research Memorandum 061, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
- Thorsten Hens & P. Jean-Jacques Herings & Arkadi Predtetchinskii, . "Limits to Arbitrage when Market Participation Is Restricted," IEW - Working Papers 176, Institute for Empirical Research in Economics - University of Zurich.
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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