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Risky Arbitrage, Limits of Arbitrage, and Nonlinear Adjustment in the Dividend-Price Ratio

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  • Gallagher, Liam A
  • Taylor, Mark P

Abstract

We provide a simple test of two alternative views of arbitrage activity: the risky arbitrage hypothesis and the limits of arbitrage hypothesis. For the U.S., the speed of reversion of the market log dividend-price ratio towards the fundamental equilibrium is a nonlinear, increasing function of the degree of mispricing, providing evidence supporting the risky arbitrage hypothesis. Further research might concentrate on particular sectors where the risks of arbitrage are greatest and its effect is therefore likely to be weakest. Copyright 2001 by Oxford University Press.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 39 (2001)
Issue (Month): 4 (October)
Pages: 524-36

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Handle: RePEc:oup:ecinqu:v:39:y:2001:i:4:p:524-36

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Cited by:
  1. Vicente Esteve & Manuel Navarro-Ibáñez & María A. Prats, 2013. "The present value model of U.S. stock prices revisited: long-run evidence with structural breaks, 1871-2010," Working Papers 1305, Department of Applied Economics II, Universidad de Valencia.
  2. Stefan Reitz & Mark Taylor, 2012. "FX intervention in the Yen-US dollar market: a coordination channel perspective," International Economics and Economic Policy, Springer, vol. 9(2), pages 111-128, June.
  3. Manzan, S., 2003. "Nonlinear Mean Reversion in Stock Prices," CeNDEF Working Papers 03-02, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  4. Stefan Reitz & M.P Taylor, 2006. "The Coordination Channel of Foreign Exchange Intervention," Computing in Economics and Finance 2006 16, Society for Computational Economics.
  5. Pavlidis Efthymios G & Paya Ivan & Peel David A, 2010. "Specifying Smooth Transition Regression Models in the Presence of Conditional Heteroskedasticity of Unknown Form," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 14(3), pages 1-40, May.
  6. McMillan, David G., 2013. "Consumption and stock prices: Evidence from a small international panel," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 76-88.
  7. Coakley, Jerry & Fuertes, Ana-Maria, 2006. "Valuation ratios and price deviations from fundamentals," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2325-2346, August.
  8. A Duarte & J L Nicolini-Llosa & I Paya, 2007. "Estimating Argentina''s imports elasticities," Working Papers 583372, Lancaster University Management School, Economics Department.
  9. Pietro Dindo & Cees Diks, 2007. "Informational differences and learning in an asset market with boundedly rational agents," Working Papers wp07-06, Warwick Business School, Finance Group.
  10. Reitz, Stefan & Taylor, Mark P., 2006. "The coordination channel of foreign exchange intervention: a nonlinear microstructural analysis," Discussion Paper Series 1: Economic Studies 2006,08, Deutsche Bundesbank, Research Centre.
  11. Reitz, Stefan & Slopek, Ulf Dieter, 2008. "Nonlinear oil price dynamics: a tale of heterogeneous speculators?," Discussion Paper Series 1: Economic Studies 2008,10, Deutsche Bundesbank, Research Centre.
  12. Omay, Nazli C. & Karadagli, Ece C., 2010. "Testing Weak Form Market Efficiency for Emerging Economies: A Nonlinear Approach," MPRA Paper 27312, University Library of Munich, Germany.
  13. Hyeongwoo Kim & Deockhyun Ryu, 2013. "Measuring the Speed of Convergence of Stock Prices: A Nonparametric and Nonlinear Approach," Auburn Economics Working Paper Series auwp2013-06, Department of Economics, Auburn University.

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