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Arbitrage and Endogenous Market Integration

Listed author(s):
  • Jean-Pierre Zigrand

    ()

We analyse a general equilibrium model of strategic arbitraging and intermediation. Arbitrageurs take advantage of mispricings, market frictions and manipulation opportunities in order to maximise profits. We analyse the effects of increased competition among arbitrageurs due to lower entry costs. Typically, markets become more liquid and integrated, and Cournot-Walas equilibria converge to Walrasian equilibria, though not uniformly: mispricings persist longer on shallow markets. We also provide a class of economies where the limiting equilibria are neither integrated nor Walrasian. Furthermore, we show that the asset pricing implications for financial innovations are quite different from standard models.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp319.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp319.

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Date of creation: Mar 1999
Handle: RePEc:fmg:fmgdps:dp319
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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  1. James Dow & Gary Gorton, 1993. "Arbitrage Chains," CEPR Financial Markets Paper 0035, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
  2. Demirguc-Kunt, Asli & Levine, Ross, 1995. "Stock market development and financial intermediaries : stylized facts," Policy Research Working Paper Series 1462, The World Bank.
  3. Andrei Shleifer & Robert W. Vishny, 1995. "The Limits of Arbitrage," NBER Working Papers 5167, National Bureau of Economic Research, Inc.
  4. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
  5. Roberts, Kevin, 1980. "The limit points of monopolistic competition," Journal of Economic Theory, Elsevier, vol. 22(2), pages 256-278, April.
  6. Fremault, Anne, 1991. "Stock Index Futures and Index Arbitrage in a Rational Expectations Model," The Journal of Business, University of Chicago Press, vol. 64(4), pages 523-547, October.
  7. Craig W. Holden, 1995. "Index arbitrage as cross‐sectional market making," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(4), pages 423-455, 06.
  8. Allen, Franklin & Gale, Douglas, 1994. "Limited Market Participation and Volatility of Asset Prices," American Economic Review, American Economic Association, vol. 84(4), pages 933-955, September.
  9. Mas-Colell,Andreu, 1990. "The Theory of General Economic Equilibrium," Cambridge Books, Cambridge University Press, number 9780521388702, December.
  10. Roberts, John & Sonnenschein, Hugo, 1977. "On the Foundations of the Theory of Monopolistic Competition," Econometrica, Econometric Society, vol. 45(1), pages 101-113, January.
  11. Jaskold Gabszewicz, Jean & Vial, Jean-Philippe, 1972. "Oligopoly "A la cournot" in a general equilibrium analysis," Journal of Economic Theory, Elsevier, vol. 4(3), pages 381-400, June.
  12. Korajczyk, Robert A, 1996. "A Measure of Stock Market Integration for Developed and Emerging Markets," World Bank Economic Review, World Bank Group, vol. 10(2), pages 267-289, May.
  13. 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.
  14. Novshek, William & Sonnenschein, Hugo, 1978. "Cournot and Walras equilibrium," Journal of Economic Theory, Elsevier, vol. 19(2), pages 223-266, December.
  15. Bisin, Alberto, 1998. "General Equilibrium with Endogenously Incomplete Financial Markets," Journal of Economic Theory, Elsevier, vol. 82(1), pages 19-45, September.
  16. Yosha, Oved, 1997. "Diversification and Competition: Financial Intermediation in a Large Cournot-Walras Economy," Journal of Economic Theory, Elsevier, vol. 75(1), pages 64-88, July.
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