Limits to arbitrage when market participation is restricted

Thorsten Hens; P.J.J. Herings; Arkadi Predtetchinskii

doi:10.1016/j.jmateco.2006.04.001

Limits to arbitrage when market participation is restricted

Thorsten Hens, P.J.J. Herings, Arkadi Predtetchinskii^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › Scientific › peer-review

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Abstract

There is an extensive literature claiming that it is often difficult to make use of arbitrage opportunities in financial 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 financial markets simultaneously. The paper gives a general result stating that failure to do so will leave some arbitrage opportunities unexploited with probability one. (c) 2006 Elsevier B.V. All rights reserved.

Original language	English
Pages (from-to)	556-564
Number of pages	9
Journal	Journal of Mathematical Economics
Volume	42
Issue number	4-5
DOIs	https://doi.org/10.1016/j.jmateco.2006.04.001
Publication status	Published - Aug 2006
Externally published	Yes
Event	1st Annual CARESS-COWLES Conference on General Equilibrium and Its Applications - New Haven Duration: 1 Jan 2005 → …

Keywords

arbitrage
bounded rationality

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10.1016/j.jmateco.2006.04.001

1-s2.0-S0304406806000425-mainFinal published version, 139 KB

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AU - Predtetchinskii, Arkadi

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AB - There is an extensive literature claiming that it is often difficult to make use of arbitrage opportunities in financial 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 financial markets simultaneously. The paper gives a general result stating that failure to do so will leave some arbitrage opportunities unexploited with probability one. (c) 2006 Elsevier B.V. All rights reserved.

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KW - bounded rationality

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T2 - 1st Annual CARESS-COWLES Conference on General Equilibrium and Its Applications

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ER -

Limits to arbitrage when market participation is restricted

Abstract

Keywords

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