Limits to Arbitrage when Market Participation Is Restricted
There is an extensive literature claiming that it is often difficult to make use of arbitrage opportunities in nancial markets. This paper provides a new reason why existing arbitrage opportunities might not be seized. We consider a world with short-lived securities, no short-selling constraints and no transaction costs. We show that to exploit all existing arbitrage opportunities, traders should pay attention to all nancial markets simultaneously. It gives a general result stating that failure to do so will leave some arbitrage oppor- tunies unexploited with probability one.
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