How Constraining Are Limits to Arbitrage?

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

Alexander Ljungqvist

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Wenlan Qian

National University of Singapore - NUS Business School

Multiple version iconThere 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

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 or http://dx.doi.org/10.2139/ssrn.2356414

Alexander Ljungqvist

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States
212-998-0304 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://pages.stern.nyu.edu/~aljungqv

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Wenlan Qian (Contact Author)

National University of Singapore - NUS Business School ( email )

15 Kent Ridge Drive
Singapore 117592, 119245
Singapore
(65) 65163015 (Phone)

HOME PAGE: http://sites.google.com/site/wenlanqian/

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