How Constraining Are Limits to Arbitrage?
69 Pages Posted: 20 Nov 2013 Last revised: 6 May 2016
Date Written: March 5, 2016
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