Advanced Search
MyIDEAS: Login

Limited Arbitrage, Segmentation, and Investor Heterogeneity: Why the Law of One Price So Often Fails

Contents:

Author Info

Abstract

There are numerous examples of assets with identical payout streams being priced differently. These violations of the law of one price result from two factors. First, investors have heterogeneous asset valuations so that if two groups of investors trade in segmented markets they are likely to set different prices because they have different expectations as to the value of the identical assets. Second, such discrepancies can only persist if arbitrage activities are limited. There appear to be two major limitations, short sales constraints and noise trader risk. Those assets facing short sales constraints have an asymmetric distribution of pricing violations because short sales constraints only bind when asset prices are too high. By contrast, assets facing noise trader risk have symmetric violation distributions because noise trader risk must be born by arbitrageurs both when prices are too low as well as too high.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://irving.vassar.edu/VCEWP/VCEWP56.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Vassar College Department of Economics in its series Vassar College Department of Economics Working Paper Series with number 56.

as in new window
Length:
Date of creation: Nov 2003
Date of revision:
Handle: RePEc:vas:papers:56

Contact details of provider:
Postal: Maildrop 708, 124 Raymond Avenue, Poughkeepsie NY 12604-0708
Phone: (914)437-7395
Fax: (914)437-7576
Web page: http://irving.vassar.edu/VCEWP/VCEWP.htm
More information through EDIRC

Related research

Keywords:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Owen A. Lamont & Richard H. Thaler, 2003. "Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 227-268, April.
  2. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991. " Investor Sentiment and the Closed-End Fund Puzzle," Journal of Finance, American Finance Association, vol. 46(1), pages 75-109, March.
  3. Rosenthal, Leonard & Young, Colin, 1990. "The seemingly anomalous price behavior of Royal Dutch/Shell and Unilever N.V./PLC," Journal of Financial Economics, Elsevier, vol. 26(1), pages 123-141, July.
  4. Stephen Morris, . "Speculative Investor Behavior and Learning," Penn CARESS Working Papers d12f7936881423171f6589501, Penn Economics Department.
  5. Flynn, Sean M., 2005. "The Portfolio Allocation Effects of Investor Sentiment about the Ability of Managers to Beat the Market," Vassar College Department of Economics Working Paper Series 77, Vassar College Department of Economics.
  6. Eli Ofek & Matthew Richardson & Robert F. Whitelaw, 2003. "Limited Arbitrage and Short Sales Restrictions: Evidence from the Options Markets," NBER Working Papers 9423, National Bureau of Economic Research, Inc.
  7. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
  8. D'Avolio, Gene, 2002. "The market for borrowing stock," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 271-306.
  9. Michael Gallmeyer & Burton Hollifield, . "An Examination of Heterogeneous Beliefs with a Short Sale Constraint," GSIA Working Papers 2002-E2, Carnegie Mellon University, Tepper School of Business.
  10. Kenneth A. Froot & Emil Dabora, 1998. "How are Stock Prices Affected by the Location of Trade?," NBER Working Papers 6572, National Bureau of Economic Research, Inc.
  11. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  12. Andrei Shleifer ad Robert W. Vishny, 1995. "The Limits of Arbitrage," Harvard Institute of Economic Research Working Papers 1725, Harvard - Institute of Economic Research.
  13. Joseph Chen & Harrison Hong & Jeremy C. Stein, 2001. "Breadth of Ownership and Stock Returns," NBER Working Papers 8151, National Bureau of Economic Research, Inc.
  14. Mark Mitchell & Todd Pulvino & Erik Stafford, 2002. "Limited Arbitrage in Equity Markets," Journal of Finance, American Finance Association, vol. 57(2), pages 551-584, 04.
  15. Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 323-36, May.
  16. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 307-339.
  17. Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2002. "Stocks are special too: an analysis of the equity lending market," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 241-269.
  18. J. Scheinkman & W. Xiong, 2002. "Overconfidence, Short-Sale Constraints and Bubbles," Princeton Economic Theory Working Papers 98734966f1c1a57373801367f, David K. Levine.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Gann, Philipp, 2009. "Liquidit├Ąt, Risikoeinstellung des Kapitalmarktes und Konjunkturerwartung als Preisdeterminanten von Collateralized Debt Obligations (CDOs) - Eine simulationsgest├╝tzte Analyse," Discussion Papers in Business Administration 10582, University of Munich, Munich School of Management.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:vas:papers:56. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sean Flynn) The email address of this maintainer does not seem to be valid anymore. Please ask Sean Flynn to update the entry or send us the correct address.

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.