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Author: | Shleifer, A. Vishny, R. W. |
Title: | The limits of arbitrage |
Journal: | Journal of Finance
1997 : MAR, VOL. 52:1, p. 35-55 |
Index terms: | ARBITRAGE FINANCIAL MARKETS ARBITRAGE PRICING THEORY SECURITIES |
Language: | eng |
Abstract: | The article describes the workings of markets in which specialized arbitrageurs invest the capital of outside investors, and where investors use arbitrageurs' performance to ascertain their ability to invest profitably. The authors show that such specialized performance-based arbitrage may not be fully effective in bringing security prices to fundamental values, especially in extreme circumstances. More generally, specialized, professional arbitrageurs may avoid extremely volatile "arbitrage" positions. The authors expect anomalies to reflect high idiosyncratic return volatility of arbitrage trades needed to eliminate the anomalies. The authors' more realistic view of arbitrage can shed light on a variety of observations in securities markets that are difficult to understand in more conventional models. |
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