The Limits of Arbitrage

27 Pages Posted: 18 Jun 2000  

Andrei Shleifer

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Robert W. Vishny

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 1995

Abstract

In traditional models, arbitrage in a given security is performed by a large number of diversified investors taking small positions against its mispricing. In reality, however, arbitrage is conducted by a relatively small number of highly specialized investors who take large positions using other people's money. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them.

Suggested Citation

Shleifer, Andrei and Vishny, Robert W., The Limits of Arbitrage (July 1995). NBER Working Paper No. w5167. Available at SSRN: https://ssrn.com/abstract=225230

Andrei Shleifer (Contact Author)

Harvard University - Department of Economics ( email )

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HOME PAGE: http://www.economics.harvard.edu/~ashleife/

National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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Robert W. Vishny

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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