How Constraining Are Limits to Arbitrage?

Ljungqvist, Alexander; Qian, Wenlan

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How Constraining Are Limits to Arbitrage?

Institute of Global Finance Working Paper No. 7

69 Pages Posted: 20 Nov 2013 Last revised: 6 May 2016

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

Wenlan Qian

National University of Singapore - NUS Business School

There are 2 versions of this paper

Date Written: March 5, 2016

Abstract

We document the existence of a strategy designed to circumvent limits to arbitrage. Faced with short-sale constraints and noise trader risk, small arbitrageurs publicly reveal their information to induce the target’s shareholders (the longs) to sell, thereby accelerating price discovery. Using data for 124 short-sale campaigns in the U.S. between 2006 and 2011, we show that investors respond strongly to the information, with spikes in SEC filing views, volatility, order imbalances, realized spreads, turnover, and selling by the longs. Share prices fall by an aggregate $14.8 billion. Our findings imply that even extreme short-sale constraints need not constrain arbitrage.

Keywords: Informational arbitrage, limits to arbitrage, short sale constraints, mispricing, short selling, activist short sellers, trading strategies, behavioral finance, market efficiency

JEL Classification: G12, G14, G23, G2

Suggested Citation: Suggested Citation

Ljungqvist, Alexander and Ljungqvist, Alexander and Qian, Wenlan, How Constraining Are Limits to Arbitrage? (March 5, 2016). Institute of Global Finance Working Paper No. 7, Available at SSRN: https://ssrn.com/abstract=2356414