Download or read book Financial Relationships and the Limits to Arbitrage written by Jiro E. Kondo and published by . This book was released on 2013 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a new foundation for the limits to arbitrage based on financial relationships between arbitrageurs and banks. Financially constrained arbitrageurs may choose to seek additional financing from banks who can understand their strategies. However, a hold-up problem arises because banks cannot commit to provide capital and have the financial technology to profit from the strategies themselves. Weary of this, arbitrageurs will choose to stay constrained and limit their correction of mispricing unless banks have sufficient reputational capital. This form of limited arbitrage arises when mispricing is largest and becomes more substantial as the degree of competition between banks intensifies and arbitrageur wealth increases.
Download or read book A Tale of Two Arbs written by Jiro Edouard Kondo and published by . This book was released on 2008 with total page 128 pages. Available in PDF, EPUB and Kindle. Book excerpt: (cont.) In Chapter 2 (joint work with Dimitris Papanikolaou), we proposes a theory for the limits to arbitrage based on financial relationships between arbitrageurs and banks. Financially constrained arbitrageurs may choose to seek additional financing from informable financiers (e.g., banks) who are initially unaware of their strategy but can understand it if it is disclosed to them. However, a hold-up problem arises because these banks cannot commit to provide capital and have the financial technology to profit from the strategies themselves. Understanding this, arbitrageurs choose to keep their strategies private and stay financially constrained. This limits their correction of mispricing unless banks have sufficient reputational capital to commit not to expropriate the arbitrageur. Using the framework of stochastic repeated games, we show that this form of limited arbitrage arises when mispricing is largest and becomes more substantial as the degree of competition between banks intensifies and arbitrageur wealth increases. More generally, it is argued that this pattern of "underinvestment" in the most profitable states is likely to occur in other settings where informable finance plays a prominent role and intellectual property rights are difficult to enforce (e.g., in the financing of innovation).
Download or read book Limits of Arbitrage and Corporate Financial Policy written by Massimo Massa and published by . This book was released on 2005 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Inefficient Markets written by Andrei Shleifer and published by OUP Oxford. This book was released on 2000-03-09 with total page 295 pages. Available in PDF, EPUB and Kindle. Book excerpt: The efficient markets hypothesis has been the central proposition in finance for nearly thirty years. It states that securities prices in financial markets must equal fundamental values, either because all investors are rational or because arbitrage eliminates pricing anomalies. This book describes an alternative approach to the study of financial markets: behavioral finance. This approach starts with an observation that the assumptions of investor rationality and perfect arbitrage are overwhelmingly contradicted by both psychological and institutional evidence. In actual financial markets, less than fully rational investors trade against arbitrageurs whose resources are limited by risk aversion, short horizons, and agency problems. The book presents and empirically evaluates models of such inefficient markets. Behavioral finance models both explain the available financial data better than does the efficient markets hypothesis and generate new empirical predictions. These models can account for such anomalies as the superior performance of value stocks, the closed end fund puzzle, the high returns on stocks included in market indices, the persistence of stock price bubbles, and even the collapse of several well-known hedge funds in 1998. By summarizing and expanding the research in behavioral finance, the book builds a new theoretical and empirical foundation for the economic analysis of real-world markets.
Download or read book How Constraining Are Limits to Arbitrage written by Alexander Ljungqvist and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Limits to arbitrage play a central role in behavioral finance. They are thought to interfere with arbitrage processes so that security prices can deviate from true values for extended periods of time. We describe a recent financial innovation that allows limits to arbitrage to be sidestepped, and overvaluation thereby to be corrected, even in settings characterized by extreme costs of information discovery and severe short-sale constraints. We report evidence of shallow-pocketed "arbitrageurs" expending considerable resources to identify overvalued companies and profitably correcting overpricing. The innovation that allows the arbitrageurs to sidestep limits to arbitrage involves credibly revealing their information to the market, in an effort to induce long investors to sell so that prices fall. This simple but apparently effective way around the limits suggests that limits to arbitrage may not always be as constraining as sometimes assumed.
Download or read book The Limits of Arbitrage and Stock Mispricing written by Naji Mohammad AlShammasi and published by . This book was released on 2015 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: The purpose of this paper is to investigate the effect of the "limits of arbitrage" on securities mispricing. Specifically, I investigate the effect of the availability of substitutes and financial constraints on stock mispricing. In addition, this study investigates the difference in the limits of arbitrage, in the sense that it will lead to lower mispricing for these stocks, relative to non-S&P 500 stocks. I also examine if the lower mispricing can be attributed to their lower limits of arbitrage. Modern finance theory and efficient market hypothesis suggest that security prices, at equilibrium, should reflect their fundamental value. If the market price deviates from the intrinsic value, then a risk-free profit opportunity has emerged and arbitrageurs will eliminate mispricing and equilibrium is restored. This arbitrage process is characterized by large number of arbitrageurs which have infinite access to capital. However, a better description of reality is that there are few numbers of arbitrageurs to the extent that they are highly specialized; and they have limited access to capital. Under these condition arbitrage is no more a risk-free activity and can be limited by several factors such as arbitrage risk and transaction costs. Other factors that are discussed in the literature are availability of substitutes and financial constraints. The former arises as a result of the specialization of arbitrageurs in the market in which they operate, while the latter arises as a result of the separation between arbitrageurs and capital. In this dissertation, I develop a measure of the availability of substitutes that is based on the propensity scores obtained from propensity score matching technique. In addition, I use the absolute value of skewness of returns as a proxy of financial constraints. Previous studies used the limits of arbitrage framework to explain pricing puzzles such as the closed-end fund discounts. However, closed-end fund discounts are highly affected by uncertainty of managerial ability and agency problems. This study overcomes this problem by studying the effect of limits of arbitrage on publicly traded securities. The results show that there is a significant relationship between proxies of limits of arbitrage and firm specific mispricing. More importantly, empirical results indicate that stocks that have no close substitutes have higher mispricing. In addition, stocks that have high skewness show higher mispricing. Subsequent studies show that the S&P 500 stocks have different levels of liquidity, analysts' coverage and volatility. These characteristics affect the ability of arbitrageurs to eliminate mispricing. Preliminary univariate tests show that S&P 500 stocks have, on average, lower mispricing and limits of arbitrage relative to non-S&P 500 stocks. In addition, the multivariate test shows that S&P 500 members have, on average, lower mispricing relative to non-S&P 500 stocks.
Download or read book Special Issue on Limits on Arbitrage written by and published by . This book was released on 2002 with total page 339 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Essays in Capital Markets written by Dimitris Papanikolaou (Ph. D.) and published by . This book was released on 2006 with total page 161 pages. Available in PDF, EPUB and Kindle. Book excerpt: (cont.) The fourth ("input") factor is found to be a robust predictor of the value-weighted market portfolio. In the third chapter, based on joint work with Jiro Kondo, we propose a new foundation for the limits to arbitrage based on financial relationships between arbitrageurs and banks. Financially constrained arbitrageurs may choose to seek additional financing from banks who can understand their strategies. However, a hold-up problem arises because banks cannot commit to provide capital and have the financial technology to profit from the strategies themselves. Wary of this, arbitrageurs will choose to stay constrained and limit their correction of mispricing unless banks have sufficient reputational capital. Using the framework of stochastic repeated games, we show that this form of limited arbitrage arises when mispricing is largest and becomes more substantial as the degree of competition between banks intensifies and arbitrageur wealth increases.
Download or read book Rational Limits to Arbitrage written by Jean-Pierre Zigrand and published by . This book was released on 2001 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Special Issue on Limits on Arbitrage written by and published by . This book was released on 2002 with total page 339 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Limits to Arbitrage Investor Sentiment and Factor Returns in International Government Bond Markets written by Adam Zaremba and published by . This book was released on 2019 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt: The perspective of behavioral finance is that anomalies in the cross-section of returns are driven by mispricing that arises from investor irrationality that cannot be easily arbitraged away. In this study, we examine the implications of this for international government bond markets. Using data for 25 countries for the years 1992-2015, we replicate multiple factor strategies that represent four major return drivers: defensive (low-risk), carry, value and momentum. We investigate the relationships between the performance of these strategies and market-wide measures of limits to arbitrage and investor sentiment. We find that the defensive strategy performs best during tight arbitrage conditions whereas severe limits to arbitrage negatively affect momentum profits.
Download or read book The Limits of Arbitrage written by Andrei Shleifer and published by . This book was released on 1995 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: In traditional models, arbitrage in a given security is performed by a large number of diversified investors taking small positions against its mispricing. In reality, however, arbitrage is conducted by a relatively small number of highly specialized investors who take large positions using other people's money. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them
Download or read book Limits of Arbitrage written by Denis Gromb and published by . This book was released on 2010 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: We survey theoretical developments in the literature on the limits of arbitrage. This literature investigates how costs faced by arbitrageurs can prevent them from eliminating mispricings and providing liquidity to other investors. Research in this area is currently evolving into a broader agenda emphasizing the role of financial institutions and agency frictions for asset prices. This research has the potential to explain so-called "market anomalies" and inform welfare and policy debates about asset markets. We begin with examples of demand shocks that generate mispricings, arguing that they can stem from behavioral or from institutional considerations. We next survey, and nest within a simple model, the following costs faced by arbitrageurs: (i) risk, both fundamental and non-fundamental, (ii) short-selling costs, (iii) leverage and margin constraints, and (iv) constraints on equity capital. We finally discuss implications for welfare and policy, and suggest directions for future research
Download or read book The Evidence and Impact of Financial Globalization written by Gerard Caprio and published by Academic Press. This book was released on 2012-11-27 with total page 807 pages. Available in PDF, EPUB and Kindle. Book excerpt: The sharp realities of financial globalization become clear during crises, when winners and losers emerge. Crises usher in short- and long-term changes to the status quo, and everyone agrees that learning from crises is a top priority. The Evidence and Impact of Financial Globalization devotes separate articles to specific crises, the conditions that cause them, and the longstanding arrangements devised to address them. While other books and journal articles treat these subjects in isolation, this volume presents a wide-ranging, consistent, yet varied specificity. Substantial, authoritative, and useful, these articles provide material unavailable elsewhere. Substantial articles by top scholars sets this volume apart from other information sources Rapidly developing subjects will interest readers well into the future Reader demand and lack of competitors underline the high value of these reference works
Download or read book Limits of Arbitrage Sentiment and Pricing Kernel written by Bing Han and published by . This book was released on 2004 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Limits of Limits of Arbitrage written by Johan Hombert and published by . This book was released on 2009 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Limits to Arbitrage when Market Participation is Restricted written by Thorsten Hens and published by . This book was released on 2004 with total page 10 pages. Available in PDF, EPUB and Kindle. Book excerpt:
