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What Is and What Is not Regulatory Arbitrage? A Review and Syntheses

In: Financial Markets, SME Financing and Emerging Economies

Author

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  • Magnus Willesson

    (Linnæus University)

Abstract

Regulatory arbitrageArbitrage is an avoidance strategy of regulation that is exercised as a result of a regulatoryRegulatory arbitrage inconsistency. As a regulatory response strategy, it has been in the shadow of other possible determinants of regulatory development. This chapter reviews 91 research articles and addresses the analytical foundations of regulatory arbitrage in the literature in a search for operative definitions, theories and methodological concerns. Despite the observation that many studies treat regulatory arbitrageRegulatory arbitrage as a phenomenon that everyone implicitly knows, the review shows that an explicit understanding of regulatory arbitrage and its motives remains scattered. Theoretically speaking, the chapter concludes that the dominant approach is that when a regulatory arbitrage opportunity exists, it is utilised. However, several theories examining the opportunity costs related to the use of regulatory arbitrage are also identified. Both methodologically and empirically, the chapter concludes that regulatory arbitrage as a strategic choice is characterised as a non-action of an event, thus delimiting the opportunities to conduct empirical research. Transaction-based regulatory arbitrageArbitrage is more straightforward, and several studies therefore present measures of regulatory arbitrage. More precise and operative definitions and expanded eclectic theoretical understanding of drivers may spur stronger empirical research and regulatory development.

Suggested Citation

  • Magnus Willesson, 2017. "What Is and What Is not Regulatory Arbitrage? A Review and Syntheses," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Giusy Chesini & Elisa Giaretta & Andrea Paltrinieri (ed.), Financial Markets, SME Financing and Emerging Economies, chapter 0, pages 71-94, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-3-319-54891-3_5
    DOI: 10.1007/978-3-319-54891-3_5
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    Cited by:

    1. Martin Herdegen & Nazem Khan, 2020. "Mean-$\rho$ portfolio selection and $\rho$-arbitrage for coherent risk measures," Papers 2009.05498, arXiv.org, revised Jul 2021.
    2. Leo Ahrens & Lukas Hakelberg & Thomas Rixen, 2022. "A victim of regulatory arbitrage? Automatic exchange of information and the use of golden visas and corporate shells," Regulation & Governance, John Wiley & Sons, vol. 16(3), pages 653-672, July.
    3. Emmanuel Lépinette & Ilya Molchanov, 2021. "Risk arbitrage and hedging to acceptability under transaction costs," Finance and Stochastics, Springer, vol. 25(1), pages 101-132, January.
    4. Martin Herdegen & Nazem Khan, 2022. "Mean‐ρ$\rho$ portfolio selection and ρ$\rho$‐arbitrage for coherent risk measures," Mathematical Finance, Wiley Blackwell, vol. 32(1), pages 226-272, January.

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