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 InfoPaper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 061.
Date of creation: 2003
Date of revision:
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Web page: http://www.maastrichtuniversity.nl/web/UMPublications.htm
Other versions of this item:
- Hens, Thorsten & Jean-Jacques Herings, P. & Predtetchinskii, Arkadi, 2006. "Limits to arbitrage when market participation is restricted," Journal of Mathematical Economics, Elsevier, vol. 42(4-5), pages 556-564, August.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-01-05 (All new papers)
- NEP-FMK-2004-01-05 (Financial Markets)
- NEP-IFN-2004-01-05 (International Finance)
- NEP-MAC-2004-01-05 (Macroeconomics)
- NEP-RMG-2004-01-05 (Risk Management)
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