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Arbitraging Arbitrageurs

Author

Listed:
  • Martin E. Ruckes
  • Mukarram Attari
  • Antonio S. Mello

Abstract

This paper develops a theory of strategic trading in markets with large influential arbitrageurs. If arbitrageurs are not very well-capitalized, margin requirements or capital constraints make their trades predictable. Other market participants can exploit this by trading against them. Competitors may even find it optimal to lend to arbitrageurs that are financially fragile; additional capital makes the arbitrageurs more viable, and lenders can reap profits from trading against them for a longer time. The strategic behavior of these market participants has implications for the functioning of financial markets. Strategic trading may produce significant price distortions, increase price manipulation activities, and trigger forced liquidations of large traders

Suggested Citation

  • Martin E. Ruckes & Mukarram Attari & Antonio S. Mello, 2004. "Arbitraging Arbitrageurs," Econometric Society 2004 North American Winter Meetings 643, Econometric Society.
    • Handle: RePEc:ecm:nawm04:643
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    More about this item

    Keywords

    arbitrage; margin constraints;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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