IDEAS home Printed from https://ideas.repec.org/p/red/sed012/831.html
   My bibliography  Save this paper

Deliberate Limits to Arbitrage

Author

Listed:
  • Guillaume Plantin

    (Toulouse School of Economics)

  • Igor Makarov

    (London Business School)

Abstract

This paper develops a model in which an arbitrageur may prefer to incur limits to arbitrage rather than seamlessly refinance his positions with other arbitrageurs in order to relax his capital constraints. Such deliberate limits to arbitrage arise because the sale of a position cannot be unbundled from the communication of the idea underlying it. The absence of property rights on arbitrage ideas implies that this creates future competition. We let arbitrage opportunities differ along the ease with which they can be identified and along the speed at which they mature. We find that such deliberate limits to arbitrage arise for arbitrage opportunities that are neither too slow nor too quick to mature. The range of maturities for which arbitrage is limited increases when arbitrage opportunities are easier to find.

Suggested Citation

  • Guillaume Plantin & Igor Makarov, 2012. "Deliberate Limits to Arbitrage," 2012 Meeting Papers 831, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:831
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2012/paper_831.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    2. Steven N. Kaplan & Joshua Rauh, 2010. "Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?," NBER Chapters, in: Corporate Governance, National Bureau of Economic Research, Inc.
    3. James J. Anton & Dennis A. Yao, 2002. "The Sale of Ideas: Strategic Disclosure, Property Rights, and Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(3), pages 513-531.
    4. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128, Elsevier.
    5. Péter Kondor, 2009. "Risk in Dynamic Arbitrage: The Price Effects of Convergence Trading," Journal of Finance, American Finance Association, vol. 64(2), pages 631-655, April.
    6. Sudipto Bhattacharya & Jay R. Ritter, 1983. "Innovation and Communication: Signalling with Partial Disclosure," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(2), pages 331-346.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Charlie X. Cai & Robert Faff & Yongcheol Shin, 2018. "Noise Momentum Around the World," Abacus, Accounting Foundation, University of Sydney, vol. 54(1), pages 79-104, March.
    2. Kahraman, Bige & Pachare, Salil, 2018. "Show us your shorts!," CEPR Discussion Papers 12658, C.E.P.R. Discussion Papers.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gary Dushnitsky, 2010. "Entrepreneurial Optimism in the Market for Technological Inventions," Organization Science, INFORMS, vol. 21(1), pages 150-167, February.
    2. Wei Xiong, 2013. "Bubbles, Crises, and Heterogeneous Beliefs," NBER Working Papers 18905, National Bureau of Economic Research, Inc.
    3. Dirk Czarnitzki & Hanna Hottenrott & Susanne Thorwarth, 2011. "Industrial research versus development investment: the implications of financial constraints," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 35(3), pages 527-544.
    4. Cakici, Nusret & Zaremba, Adam, 2022. "Salience theory and the cross-section of stock returns: International and further evidence," Journal of Financial Economics, Elsevier, vol. 146(2), pages 689-725.
    5. Hanna Hottenrott & Bronwyn H. Hall & Dirk Czarnitzki, 2016. "Patents as quality signals? The implications for financing constraints on R&D," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 25(3), pages 197-217, April.
    6. Augusto de la Torre & Alain Ize, 2010. "Containing Systemic Risk: Paradigm-Based Perspectives on Regulatory Reform," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2010), pages 25-64, August.
    7. Sudipto Bhattacharya & Sergei Guriev, 2006. "Patents vs. Trade Secrets: Knowledge Licensing and Spillover," Journal of the European Economic Association, MIT Press, vol. 4(6), pages 1112-1147, December.
    8. Hong, Xianpei & Zhou, Menghuan & Gong, Yeming, 2021. "Dilemma of quality information disclosure in technology licensing," European Journal of Operational Research, Elsevier, vol. 294(2), pages 543-557.
    9. Czarnitzki, Dirk & Hottenrott, Hanna, 2012. "Collaborative R&D as a strategy to attenuate financing constraints," ZEW Discussion Papers 12-049, ZEW - Leibniz Centre for European Economic Research.
    10. Hanna Hottenrott & Bettina Peters, 2012. "Innovative Capability and Financing Constraints for Innovation: More Money, More Innovation?," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1126-1142, November.
    11. Kondor, Péter & Sadka, Ronnie & Kang, Namho, 2011. "Idiosyncratic Return Volatility in the Cross-Section of Stocks," CEPR Discussion Papers 8307, C.E.P.R. Discussion Papers.
    12. Patrick Bolton & Tano Santos & Jose A. Scheinkman, 2011. "Outside and Inside Liquidity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(1), pages 259-321.
    13. Zhou, Liyun & Yang, Chunpeng, 2019. "Stochastic investor sentiment, crowdedness and deviation of asset prices from fundamentals," Economic Modelling, Elsevier, vol. 79(C), pages 130-140.
    14. Bachmann, Manuel, 2018. "Market Illiquidity, Credit Freezes and Endogenous Funding Constraints," Department of Economics Working Paper Series 255, WU Vienna University of Economics and Business.
    15. Brunnermeier, Markus K. & Oehmke, Martin, 2013. "Bubbles, Financial Crises, and Systemic Risk," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1221-1288, Elsevier.
    16. Jaimin Goh & Jaehong Lee & Wonchang Hur & Yunchang Ju, 2019. "Do Analysts Fully Reflect Information in Patents about Future Earnings?," Sustainability, MDPI, vol. 11(10), pages 1-17, May.
    17. Alex Edmans & Itay Goldstein & Wei Jiang, 2011. "Feedback Effects and the Limits to Arbitrage," NBER Working Papers 17582, National Bureau of Economic Research, Inc.
    18. Deepak Hegde & Hong Luo, 2018. "Patent Publication and the Market for Ideas," Management Science, INFORMS, vol. 64(2), pages 652-672, February.
    19. Augusto De La Torre & Alain Ize, 2010. "Regulatory Reform: Integrating Paradigms," International Finance, Wiley Blackwell, vol. 13(1), pages 109-139, March.
    20. Chen, Shiyi & Chng, Michael T. & Liu, Qingfu, 2021. "The implied arbitrage mechanism in financial markets," Journal of Econometrics, Elsevier, vol. 222(1), pages 468-483.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed012:831. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.