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Strategic arbitrage in segmented markets

Author

Listed:
  • Bryzgalova, Svetlana
  • Pavlova, Anna
  • Sikorskaya, Taisiya

Abstract

We propose a model in which arbitrageurs act strategically in markets with entry costs. In a repeated game, arbitrageurs choose to specialize in some markets, which leads to the highest combined profits. We present evidence consistent with our theory from the options market, in which suboptimally unexercised options create arbitrage opportunities for intermediaries. We use transaction-level data to identify the corresponding arbitrage trades. Consistent with the model, only 57% of these opportunities attract entry by arbitrageurs. Of those that do, 49% attract only one arbitrageur. Finally, we detail how market participants circumvent a regulation devised to curtail this arbitrage strategy.

Suggested Citation

  • Bryzgalova, Svetlana & Pavlova, Anna & Sikorskaya, Taisiya, 2025. "Strategic arbitrage in segmented markets," Journal of Financial Economics, Elsevier, vol. 166(C).
    • Handle: RePEc:eee:jfinec:v:166:y:2025:i:c:s0304405x25000169
    DOI: 10.1016/j.jfineco.2025.104008
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    More about this item

    Keywords

    Arbitrage; Repeated game; Entry cost; Dividend play; Tacit collusion; Regulatory effectiveness; Options;
    All these keywords.

    JEL classification:

    • G5 - Financial Economics - - Household Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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