36 Pages Posted: 14 Oct 2014 Last revised: 22 Sep 2015
Date Written: September 4, 2015
When investors have limited attention, an arbitrageur who identifies several mispriced assets will advertise a single asset and overweight it in his portfolio. When several arbitrageurs identify the same arbitrage opportunities, their decisions are strategic complements: they invest in the same asset and advertise it. Then, multiple equilibria may arise, some of which inefficient: arbitrageurs may correct small mispricings while failing to eliminate large ones. Finally, reputation matters: arbitrageurs with a good track record influence prices with their ads more than those with no track record, and even more than arbitrageurs who proved wrong in the past.
Keywords: limits to arbitrage, advertising, price discovery, limited attention
JEL Classification: G11, G14, G02, D84
Suggested Citation: Suggested Citation