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Deliberate Limits to Arbitrage

Author

Listed:
  • Guillaume Plantin

    (Toulouse School of Economics)

  • Igor Makarov

    (London Business School)

Abstract

This paper develops a model in which an arbitrageur may prefer to incur limits to arbitrage rather than seamlessly refinance his positions with other arbitrageurs in order to relax his capital constraints. Such deliberate limits to arbitrage arise because the sale of a position cannot be unbundled from the communication of the idea underlying it. The absence of property rights on arbitrage ideas implies that this creates future competition. We let arbitrage opportunities differ along the ease with which they can be identified and along the speed at which they mature. We find that such deliberate limits to arbitrage arise for arbitrage opportunities that are neither too slow nor too quick to mature. The range of maturities for which arbitrage is limited increases when arbitrage opportunities are easier to find.

Suggested Citation

  • Guillaume Plantin & Igor Makarov, 2012. "Deliberate Limits to Arbitrage," 2012 Meeting Papers 831, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:831
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    References listed on IDEAS

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    3. James J. Anton & Dennis A. Yao, 2002. "The Sale of Ideas: Strategic Disclosure, Property Rights, and Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(3), pages 513-531.
    4. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128, Elsevier.
    5. Péter Kondor, 2009. "Risk in Dynamic Arbitrage: The Price Effects of Convergence Trading," Journal of Finance, American Finance Association, vol. 64(2), pages 631-655, April.
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