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Limits to arbitrage when market participation is restricted

  • Hens, Thorsten
  • Jean-Jacques Herings, P.
  • Predtetchinskii, Arkadi

There is an extensive litarature claiming that it is often difficult to make use of arbitrage opportunities in financial markets. This paper provides a new reason why existing arbitrage opportunities might not be seized. We consider a world with short-lived securities, no short-selling constraints and no transaction costs. We show that to exploit all existing arbitrage opportunities, traders should pay attention to all financial markets simultaneously. It gives a general result stating that failure to do so will leave some arbitrage opportunities unexploited with probability one.

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Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 42 (2006)
Issue (Month): 4-5 (August)
Pages: 556-564

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Handle: RePEc:eee:mateco:v:42:y:2006:i:4-5:p:556-564
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  1. Basak, Suleyman & Croitoru, Benjamin, 2000. "Equilibrium Mispricing in a Capital Market with Portfolio Constraints," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 715-48.
  2. Dimitri Vayanos, 2003. "The Decentralization of Information Processing in the Presence of Interactions," Review of Economic Studies, Wiley Blackwell, vol. 70(3), pages 667-695, 07.
  3. Polemarchakis, H. M. & Siconolfi, P., 1997. "Generic existence of competitive equilibria with restricted participation," Journal of Mathematical Economics, Elsevier, vol. 28(3), pages 289-311, October.
  4. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272.
  5. Radner, Roy & Rothschild, Michael, 1975. "On the allocation of effort," Journal of Economic Theory, Elsevier, vol. 10(3), pages 358-376, June.
  6. Van Zandt, Timothy, 1999. "Real-Time Decentralized Information Processing as a Model of Organizations with Boundedly Rational Agents," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 633-58, July.
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