A Transaction-Level Analysis of Spatial Arbitrage: The Role of Habit, Attention, and Electronic Trading

Eric Overby, Jonathan Clarke (2012) A Transaction-Level Analysis of Spatial Arbitrage: The Role of Habit, Attention, and Electronic Trading. Management Science 58(2):394-412

30 Pages Posted: 21 Jul 2010 Last revised: 9 Jun 2016

See all articles by Eric M. Overby

Eric M. Overby

Georgia Institute of Technology

Jonathan Clarke

Georgia Institute of Technology - Scheller College of Business

Date Written: November 20, 2011

Abstract

Despite the central role of arbitrage in finance and economic theory, there is limited evidence of the factors that create and eliminate arbitrage opportunities, how often arbitrage occurs, and how profitable it is. We address these gaps via a transaction-level analysis of spatial arbitrage in the wholesale automotive market. We investigate why arbitrage opportunities are created by analyzing how sellers choose where to sell vehicles. We find that the attention sellers pay to the distribution of a vehicle is negatively related to the probability that it is arbitraged. Arbitrage occurs in approximately 1% of transactions, although electronic trading is making arbitrage less prevalent by improving buyer/seller matching across locations. Arbitrage yields a 5.6% return on average, although arbitrageurs take a loss 14% of the time. Our results contribute to the literature on arbitrage, the effect of attention allocation on market outcomes, and the effect of information technology on market efficiency.

Keywords: Limited Attention, Market Speculation, Electronic Trading, Information Technology, Automotive, Spatial Arbitrage, Market Integration

Suggested Citation

Overby, Eric M. and Clarke, Jonathan, A Transaction-Level Analysis of Spatial Arbitrage: The Role of Habit, Attention, and Electronic Trading (November 20, 2011). Eric Overby, Jonathan Clarke (2012) A Transaction-Level Analysis of Spatial Arbitrage: The Role of Habit, Attention, and Electronic Trading. Management Science 58(2):394-412. Available at SSRN: https://ssrn.com/abstract=1645930 or http://dx.doi.org/10.2139/ssrn.1645930

Eric M. Overby (Contact Author)

Georgia Institute of Technology ( email )

800 West Peachtree St., NW
Atlanta, GA 30308-1149
United States

Jonathan Clarke

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-4929 (Phone)
404-894-6030 (Fax)

HOME PAGE: http://mgt.gatech.edu/directory/clarke.html

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