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Anything is Possible: On the Existence and Uniqueness of Equilibria in the Shleifer-Vishny Model of Limits of Arbitrage

Listed author(s):
  • Arnold, Lutz G.

This paper gives a complete characterization of the equilibria in Shleifer and Vishny's (1997) model of "Limits of Arbitrage". We show that expected wealth (the arbitrageurs' objective function) is a possibly non-concave function of investment and that the relation between investment and prices is not necessarily continuous or single-valued or well-defined. As a result, "anything is possible": non-existence or multiplicity of equilibria may arise, and sunspots may govern the equilibrium selection in the latter case. Es wird eine vollständige Charakterisierung möglicher Gleichgewichte im Shleifer-Vishny-Modell zu Grenzen der Arbitrage vorgenommen. Zunächst wird gezeigt, dass die Zielfunktion der Arbitrageure - ihr erwartetes Vermögen - eine nicht-konkave Funktion ihrer Investitionen ist und dass die Abbildung, die die aggregierten Investitionen und die Vermögenspreise in Beziehung zueinander setzt, möglicherweise unstetig, mehrwertig oder gar nicht wohldefiniert ist. Als Konsequenz hieraus "ist alles möglich": Nicht-Existenz eines Gleichgewichts ebenso wie Multiplizität. Im zweiten Fall können Sonnenflecken die Gleichgewichtsauswahl bestimmen.

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Paper provided by University of Regensburg, Department of Economics in its series University of Regensburg Working Papers in Business, Economics and Management Information Systems with number 418.

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Date of creation: 2006
Handle: RePEc:bay:rdwiwi:732
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  1. 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.
  2. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
  3. Glaser, Markus & Nöth, Markus & Weber, Martin, 2003. "Behavioral finance," Papers 03-14, Sonderforschungsbreich 504.
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