Abstract

http://ssrn.com/abstract=1324423
 
 

References (9)



 
 

Citations (3)



 


 



Is Arbitrage Socially Beneficial?


E. Glen Weyl


Microsoft Research New England; University of Chicago

October 15, 2007


Abstract:     
Economists often associate information efficiency of prices with allocative (Pareto) efficiency. When arbitrageurs connect segmented markets to correct a misallocation of risk, this assumption is sound. However, when opportunities for arbitrage or financial innovation arise from mispricings caused by the presence of confused investors or other distortions, such market-making is harmful. Rather than arbitrage facilitating the flow of risk to those who can most efficiently bear it, this harmful arbitrage allocates risk to those who least understand it. The beneficial effects of efficient pricing on real investment decision mitigate the harms caused by arbitrage, but also limits its benefits by providing substitute insurance. Even when arbitrage is not strictly harmful, it may be oversupplied, especially given that it typically employ some of the most talented workers.

Number of Pages in PDF File: 19

Keywords: arbitrage, social welfare, behavioral finance, credit crisis

JEL Classification: D52, D61, D82, G18

working papers series


Download This Paper

Date posted: January 8, 2009  

Suggested Citation

Weyl, E. Glen, Is Arbitrage Socially Beneficial? (October 15, 2007). Available at SSRN: http://ssrn.com/abstract=1324423 or http://dx.doi.org/10.2139/ssrn.1324423

Contact Information

Eric Glen Weyl (Contact Author)
Microsoft Research New England ( email )
One Memorial Drive, 14th Floor
Cambridge, MA 02142
United States
(857) 998-4513 (Phone)
HOME PAGE: http://www.glenweyl.com
University of Chicago ( email )
1126 East 59th Street
Chicago, IL 60637
United States
(773) 702-4862 (Phone)
(773) 702-8490 (Fax)
HOME PAGE: http://www.glenweyl.com
Feedback to SSRN


Paper statistics
Abstract Views: 830
Downloads: 114
Download Rank: 142,630
References:  9
Citations:  3

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo2 in 0.266 seconds