Download or read book Limits to Arbitrage and Market Overvaluation written by Xiaoting Hao and published by . This book was released on 2011 with total page 180 pages. Available in PDF, EPUB and Kindle. Book excerpt: Previous literature suggests that (1) idiosyncratic risk, short sale constraints, and illiquidity are important limits to arbitrage that allow mispricing to persist in the financial markets, and (2) they possess heterogeneous explanatory power in predicting the persistence of market mispricing. My dissertation comprehensively studies the roles of multiple limits to arbitrage and examines their relative importance in explaining different types of market overvaluation. I first classify overvaluation into market overreaction to positive news and market underreaction to negative news. For each group, two competing theories of the causes of mispricing, information uncertainty, and market friction, are analyzed to provide testable hypotheses relating the type of overvaluation to the limit(s) of arbitrage that are expected to drive the persistent market mispricing. Thorough empirical analyses of representative corporate events, seasoned equity offering, and post-earnings-announcement drift, are then conducted to provide support for the correlations between limits to arbitrage and market overvaluation. The results suggest that, for both market overreaction to positive news and underreaction to negative news, idiosyncratic risk is the dominant constraint on arbitrage for overvaluation generated by information uncertainty. However, short sale constraints and illiquidity are more dominant for overvaluation generated by market frictions.
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 How Constraining are Limits to Arbitrage written by Alexander Ljungqvist and published by . This book was released on 2019 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine to what extent institutional frictions such as short-sale constraints deter entry into informational arbitrage ex ante and reduce informational efficiency ex post. We focus on small arbitrageurs who target hard-to-short companies with correspondingly high potential for overvaluation. Being price-takers, they cannot correct mispricing through trading. Instead, they reveal their information to the market in an effort to induce long investors to sell so that prices fall. As long as the information is credible, revealing it accelerates price discovery and so reduces noise trader risk. By implication, even extreme short-sale constraints need not constrain arbitrage, as is often assumed.
Download or read book Investor Sentiment Limits to Arbitrage and Private Market Returns written by David C. Ling and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the relation between investor sentiment and returns in private markets. Relative to more liquid public markets, private investment markets exhibit significant limits to arbitrage that restrict an investor's ability to counteract mispricing. We utilize private commercial real estate as the testing ground for our analysis due to the significant limits to arbitrage that characterize this market. Using vector autoregressive models, we find a positive and economically significant relation between investor sentiment and subsequent private market returns. A one standard deviation shock in sentiment results in a 3.0% increase in returns over the subsequent three quarters. We provide further long-horizon regression evidence suggesting that private real estate markets are susceptible to prolonged periods of sentiment-induced mispricing as the inability to short-sell in periods of overvaluation and restricted access to credit in periods of undervaluation prevents arbitrageurs from entering the market.
Download or read book The Limits of the Limits of Arbitrage written by Alon Brav and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide evidence that the limits of arbitrage approach cannot explain economically important asset pricing anomalies. Anomalous positive stock returns (to small firms, value firms, recent winners, and firms with positive abnormal earnings announcements) are strongest when limits to arbitrage are lowest, directly contrary to the prediction of theories resting on limits to arbitrage. Anomalously poor returns to small growth stocks do occur only when limits to arbitrage are high, consistent with theories resting on limits to arbitrage, but affects less than 1% of the market value of the CRSP universe of United States common stocks.
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:
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 The Limits of Arbitrage and Stock Mispricing written by Naji Al-Shammasi and published by . This book was released on 2017 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate how security specific mispricing may persist under limits to arbitrage; specifically, when arbitragers are limited by the availability of substitutes and financial constraints. We use a part of the market to book decomposition as a proxy for mispricing. The availability of substitutes measure is developed by utilizing the predicted values from a propensity score matching technique based on the Fama and French three-factor model. Arbitrageurs' financial constraint is captured by the skewness of returns. We find that, on average, stocks with closer substitutes have lower firm specific mispricing, while financial constraints have a positive impact on firm specific mispricing.
Download or read book Limits to Arbitrage written by Nidhi Aggarwal and published by . This book was released on 2015 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: Market frictions such as transactions costs, funding constraints and short selling constraints limit arbitrage, but these frictions affect different stocks differently. Using intraday data on a liquid single stock futures and spot market, we examine the effect of these frictions on arbitrage efficiency of the two markets. We find evidence of significant cross-sectional variation in the size and asymmetricity of no-arbitrage bands. To the extent that market frictions affect all stocks similarly, commonality in the size of no-arbitrage bands is expected. We find that 17% of variation in the size of no-arbitrage bands is explained by the first principal component. Changes in funding liquidity is a key factor that determines variation in the common component.
Download or read book Limits of Arbitrage Theory and Evidence from the Mortgage backed Securities Market written by Xavier Gabaix and published by . This book was released on 2005 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
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 Limits of Arbitrage written by Xavier Gabaix and published by . This book was released on 2008 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: Quot;Limits of Arbitragequot; theories require that the marginal investor in a particular asset market be a specialized arbitrageur. Then the constraints faced by this arbitrageur (i.e. capital constraints) feed through into asset prices. We examine the mortgage-backed securities (MBS) market in this light, as casual empiricism suggests that investors in the MBS market do seem to be very specialized. We show that risks that seem relatively minor for aggregate wealth are priced in the MBS market. A simple pricing kernel based on the aggregate value of MBS securities prices risk in the MBS market. A pricing kernel based on aggregate consumption or aggregate wealth implies the wrong sign for the price of MBS risk. The evidence suggests that limits of arbitrage theories can explain the cross-sectional and time-series behavior of spreads in this market.
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 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Valuation Bias and Limits to Nudges written by Hersh Shefrin and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Because of limits to arbitrage, it is reasonable for sell-side analysts' target prices to deviate from their corresponding estimates of future fundamental value. Although this inequality does not imply that sell-side analysts should provide biased estimates of fundamental value, many do. A key contributor to this bias is the unwarranted assumption that in the long run, firms can be expected to earn more than their cost of capital. Biased estimates of fundamental value can harm long-term investors. At the same time, there are simple nudges that can help avoid the bias. Nevertheless, limits to nudges associated with buy-side catering prevent their application. The magnitude of the associated bias can be substantial for the stocks of large firms that dominate the market. Notably, sell-side analysts' upwardly biased estimated fundamental values for these stocks lie in the vicinity of consensus target prices and market prices. This suggests that valuation bias associated with stocks of large firms that dominate the market is consistent with intermittent overvaluation of these stocks and the overall market.
Download or read book The Structural Foundations of International Finance written by Padoan, P.C. Brenton, P.A. Boyd, G. and published by Edward Elgar Publishing. This book was released on 2003 with total page 264 pages. Available in PDF, EPUB and Kindle. Book excerpt: The principal message of this book is that international financial enterprises must be reoriented towards funding productive activities rather than potentially destabilizing speculation. The effects of financial sector operations are addressed with serious warnings that the dangers of speculative destabilization are increasing as regulatory and market discipline gradually weakens. The Structural Foundations of International Finance examines the ways in which national economies, especially those of industrialized countries, are affected by the operations of international financial markets. Although these markets provide productive funding, there is also much speculative trading in stocks and currencies which can cause booms, slumps and hinder recovery. The authors advocate entrepreneurial coordination by productive enterprises for balanced and stable growth, with reduced risks of financial crises and recessions.
Download or read book Behavioral Corporate Finance written by Hersh Shefrin and published by College Ie Overruns. This book was released on 2017-04-16 with total page 300 pages. Available in PDF, EPUB and Kindle. Book excerpt:
