Published in:WBS Finance Group Research Paper ; No. 134
Extent:
1 Online-Ressource (56 p)
Language:
English
DOI:
10.2139/ssrn.1540693
Identifier:
Origination:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments January 21, 2010 erstellt
Description:
In this paper, we challenge the notion that exploiting “riskless” arbitrage is riskless. We show that if rational agents face uncertainty about completing their arbitrage portfolios, then arbitrage is limited even in markets with perfect substitutes and convertibility. We call this phenomenon “execution risk” in arbitrage exploitation. Using a simple model, we demonstrate that this risk arises from the crowding effect of competing arbitrageurs entering the same trade and inflicting negative externalities on each other. We argue that the cost of illiquidity and holding inventory are potential negative externalities. Our empirical results provide evidence that support the relevance of execution risk in arbitrage