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Limited Arbitrage in Equity Markets

  • Mark Mitchell

    (Harvard University,)

  • Todd Pulvino

    (Northwestern University)

  • Erik Stafford

    (Harvard University,)

We examine 82 situations where the market value of a company is less than its subsidiary. These situations imply arbitrage opportunities, providing an ideal setting to study the risks and market frictions that prevent arbitrageurs from immediately forcing prices to fundamental values. For 30 percent of the sample, the link between the parent and its subsidiary is severed before the relative value discrepancy is corrected. Furthermore, returns to a specialized arbitrageur would be 50 percent larger if the path to convergence was smooth rather than as observed. Uncertainty about the distribution of returns and characteristics of the risks limits arbitrage. Copyright The American Finance Association 2002.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 57 (2002)
Issue (Month): 2 (04)
Pages: 551-584

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Handle: RePEc:bla:jfinan:v:57:y:2002:i:2:p:551-584
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