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Arbitrage and endogenous market integration

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  • Zigrand, Jean-Pierre

Abstract

We analyze a general equlibrium model of strategic arbitraging and intermediation. Arbitrageurs take advantage of mispricings, market frictions and manipulation opportunities in order to maximize profits. We analyze the effects of increased competition among arbitrageurs due to lower entry costs. Typically, markets become more liquid and integrated, and Cournot-Walras equilibria converge to Walrasian equilibria, though not uniformly: mispricings persist longer on shallow markets. We also provide a class of economies where the limiting equilibria are neither integrated nor Walrasian. Furthermore, we show that the asset pricing implications for financial innovations are quite different from standard models.

Suggested Citation

  • Zigrand, Jean-Pierre, 1999. "Arbitrage and endogenous market integration," LSE Research Online Documents on Economics 119127, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119127
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    File URL: http://eprints.lse.ac.uk/119127/
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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