36 Pages Posted: 2 May 2014 Last revised: 15 Sep 2018
Date Written: September 05, 2018
When investors have limited attention, an arbitrageur who identifies several mispriced assets will advertise a single asset. He will overweight it in his portfolio, the more so the more precise his private signal relative to public information, and the larger his investor following. Unlike classic insiders, advertisers prefer assets with the least noise trading. They target the most mispriced assets, and avoid advertising when other news distract investors. When several arbitrageurs identify the same opportunities, they will advertise the same asset. Then, multiple equilibria arise, some of which inefficient: arbitrageurs may correct small mispricings while failing to eliminate large ones.
Keywords: limits to arbitrage, advertising, price discovery, limited attention
JEL Classification: G11, G14, G2, D84
Suggested Citation: Suggested Citation