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Price Manipulation and Quasi-Arbitrage

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  • Gur Huberman
  • Werner Stanzl

Abstract

In an environment where trading volume affects security prices and where prices are uncertain when trades are submitted, quasi-arbitrage is the availability of a series of trades that generate infinite expected profits with an infinite Sharpe ratio. We show that when the price impact of trades is permanent and time-independent, only linear price-impact functions rule out quasi-arbitrage and thus support viable market prices. When trades have also a temporary price impact, only the permanent price impact must be linear while the temporary one can be of a more general form. We also extend the analysis to a time-dependent framework. Copyright The Econometric Society 2004.

Suggested Citation

  • Gur Huberman & Werner Stanzl, 2004. "Price Manipulation and Quasi-Arbitrage," Econometrica, Econometric Society, vol. 72(4), pages 1247-1275, July.
  • Handle: RePEc:ecm:emetrp:v:72:y:2004:i:4:p:1247-1275
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    File URL: http://hdl.handle.net/10.1111/j.1468-0262.2004.00531.x
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    References listed on IDEAS

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    1. Ernst Fehr & Georg Kirchsteiger & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, Oxford University Press, pages 437-459.
    2. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, pages 7-45.
    3. Ernst Fehr & Georg Kirchsteiger & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, Oxford University Press, pages 437-459.
    4. Guth, Werner, 1995. "An Evolutionary Approach to Explaining Cooperative Behavior by Reciprocal Incentives," International Journal of Game Theory, Springer;Game Theory Society, pages 323-344.
    5. repec:fth:prinin:345 is not listed on IDEAS
    6. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, pages 122-142.
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