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The Value of Arbitrage

Author

Listed:
  • Eduardo Dávila
  • Daniel D. Graves
  • Cecilia Parlatore

Abstract

This paper studies the social value of closing price differentials in financial markets. We show that arbitrage gaps (price differentials between markets) exactly correspond to the marginal social value of executing an arbitrage trade. We further show that arbitrage gaps and measures of price impact are sufficient to compute the total social value from closing an arbitrage gap. Theoretically, we show that, for a given arbitrage gap, the total social value of arbitrage is higher in more liquid markets. We apply our framework to compute the welfare gains from closing arbitrage gaps in the context of covered interest parity violations and several dual-listed companies. The estimates of the value of closing arbitrage gaps vary substantially across applications.

Suggested Citation

  • Eduardo Dávila & Daniel D. Graves & Cecilia Parlatore, 2022. "The Value of Arbitrage," NBER Working Papers 29744, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29744
    Note: AP EFG IFM
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    Cited by:

    1. is not listed on IDEAS
    2. Balakin, Sergei & Roger, Guillaume, 2025. "Dynamic trading strategies for storage," Journal of Economic Dynamics and Control, Elsevier, vol. 176(C).

    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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