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Liquidity cognition and limits of arbitrage

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  • A. Mantovi

    ()

  • G. Tagliavini

    ()

Abstract

An inquiry about the limits of arbitrage connected with liquidity cognition is set forth. The hierarchy of money (Mehrling, 2012b; Pozsar, 2014) is shown to provide sharp insights on the emergence of endogenous constraints which may limit the strategic space of professional arbitrageurs in empirically relevant contexts. A case study (Mitchell and Pulvino, 2012) sets the stage for our theoretical proposal. Our approach is conjectured to represent a fruitful line of progress for behavioral finance.

Suggested Citation

  • A. Mantovi & G. Tagliavini, 2017. "Liquidity cognition and limits of arbitrage," Economics Department Working Papers 2017-EP01, Department of Economics, Parma University (Italy).
  • Handle: RePEc:par:dipeco:2017-ep01
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    References listed on IDEAS

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    1. Aloísio Araújo & Susan Schommer & Michael Woodford, 2015. "Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 1-43, January.
    2. Perry Mehrling, 2012. "Three Principles for Market-Based Credit Regulation," American Economic Review, American Economic Association, vol. 102(3), pages 107-112, May.
    3. Lasse Heje Pedersen & Mark Mitchell & Todd Pulvino, 2007. "Slow Moving Capital," American Economic Review, American Economic Association, vol. 97(2), pages 215-220, May.
    4. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272.
    5. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    6. Jean Tirole, 2011. "Illiquidity and All Its Friends," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 287-325, June.
    7. Nashikkar, Amrut & Subrahmanyam, Marti G. & Mahanti, Sriketan, 2011. "Liquidity and Arbitrage in the Market for Credit Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(03), pages 627-656, June.
    8. George Soros, 2013. "Fallibility, reflexivity, and the human uncertainty principle," Journal of Economic Methodology, Taylor & Francis Journals, vol. 20(4), pages 309-329, December.
    9. Manmohan Singh, 2013. "The Changing Collateral Space," IMF Working Papers 13/25, International Monetary Fund.
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    12. Laurent Grillet-Aubert & Jean-Baptiste Haquin & Clive Jackson & Neill Killeen & Christian Weistroffer, 2016. "Assessing shadow banking – non-bank financial intermediation in Europe," ESRB Occasional Paper Series 10, European Systemic Risk Board.
    13. Robert J. Shiller, 2014. "Speculative Asset Prices (Nobel Prize Lecture)," Cowles Foundation Discussion Papers 1936, Cowles Foundation for Research in Economics, Yale University.
    14. Holmström, Bengt, 2013. "Inside and Outside Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262518536, January.
    15. Amy Dittmar, 2008. "Corporate Cash Policy and How to Manage it with Stock Repurchases," Journal of Applied Corporate Finance, Morgan Stanley, vol. 20(3), pages 22-34.
    16. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
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    18. Karan Bhanot & Liang Guo, 2012. "Types of liquidity and limits to arbitrage—the case of credit default swaps," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 32(4), pages 301-329, April.
    19. Mitchell, Mark & Pulvino, Todd, 2012. "Arbitrage crashes and the speed of capital," Journal of Financial Economics, Elsevier, vol. 104(3), pages 469-490.
    20. Zoltan Pozsar, 2014. "Shadow Banking: The Money View," Working Papers 14-04, Office of Financial Research, US Department of the Treasury.
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    More about this item

    Keywords

    Liquidity; Limits of arbitrage; Hierarchy of Money;

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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