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Limits to arbitrage when market participation is restricted

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  • Hens, Thorsten
  • Jean-Jacques Herings, P.
  • Predtetchinskii, Arkadi

Abstract

There 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 Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 42 (2006)
Issue (Month): 4-5 (August)
Pages: 556-564

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Handle: RePEc:eee:mateco:v:42:y:2006:i:4-5:p:556-564

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Web page: http://www.elsevier.com/locate/jmateco

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  1. Polemarchakis, H. M. & Siconolfi, P., 1997. "Generic existence of competitive equilibria with restricted participation," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 28(3), pages 289-311, October.
  2. Suleyman Basak & Benjamin Croitoru, . "Equilibrium Mispricing in a Capital Market with Portfolio Constraints," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 17-99, Wharton School Rodney L. White Center for Financial Research.
  3. Dimitri Vayanos, 2003. "The Decentralization of Information Processing in the Presence of Interactions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(3), pages 667-695, 07.
  4. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198292272, October.
  5. Radner, Roy & Rothschild, Michael, 1975. "On the allocation of effort," Journal of Economic Theory, Elsevier, Elsevier, vol. 10(3), pages 358-376, June.
  6. Van Zandt, Timothy, 1999. "Real-Time Decentralized Information Processing as a Model of Organizations with Boundedly Rational Agents," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(3), pages 633-58, July.
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Cited by:
  1. Bernard Cornet & Ramu Gopalan, 2009. "Arbitrage and equilibrium with portofolio constraints," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 09077, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  2. Alasdair Brown, 2013. "Information Acquisition in Ostensibly Efficient Markets," University of East Anglia Applied and Financial Economics Working Paper Series, School of Economics, University of East Anglia, Norwich, UK. 043, School of Economics, University of East Anglia, Norwich, UK..
  3. Gori, Michele & Pireddu, Marina & Villanacci, Antonio, 2013. "Regularity and Pareto improving on financial equilibria with price-dependent borrowing restrictions," Research in Economics, Elsevier, Elsevier, vol. 67(1), pages 100-110.
  4. Carosi, Laura & Gori, Michele & Villanacci, Antonio, 2009. "Endogenous restricted participation in general financial equilibrium," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 45(12), pages 787-806, December.
  5. Michele Gori & Marina Pireddu & Antonio Villanacci, 2010. "Regularity and Pareto Improving on financial equilibria with endogenous borrowing restrictions," Working Papers - Mathematical Economics, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa 2010-08, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa, revised Aug 2012.

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