Advertising Arbitrage

36 Pages Posted: 2 May 2014 Last revised: 15 Sep 2018

See all articles by Sergey Kovbasyuk

Sergey Kovbasyuk

Einaudi Institute for Economics and Finance (EIEF)

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics; Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

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Date Written: September 05, 2018

Abstract

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

Kovbasyuk, Sergey and Pagano, Marco, Advertising Arbitrage (September 05, 2018). Available at SSRN: https://ssrn.com/abstract=2431270 or http://dx.doi.org/10.2139/ssrn.2431270

Sergey Kovbasyuk (Contact Author)

Einaudi Institute for Economics and Finance (EIEF) ( email )

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Marco Pagano

University of Naples Federico II - Department of Economics and Statistics ( email )

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Centre for Studies in Economics and Finance (CSEF) ( email )

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Einaudi Institute for Economics and Finance (EIEF)

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Research Institute of Industrial Economics (IFN)

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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