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The Limits of Arbitrage

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  • Andrei Shleifer
  • Robert W. Vishny

Abstract

In traditional models, arbitrage in a given security is performed by a large number of diversified investors taking small positions against its mispricing. In reality, however, arbitrage is conducted by a relatively small number of highly specialized investors who take large positions using other people's money. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5167.

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Date of creation: Jul 1995
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Publication status: published as Journal of Finance, Vol. 52, no. 1 (1997): 35-55.
Handle: RePEc:nbr:nberwo:5167

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