Advertising Arbitrage

36 Pages Posted: 14 Oct 2014 Last revised: 22 Sep 2015

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); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: September 4, 2015

Abstract

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

Kovbasyuk, Sergey and Pagano, Marco, Advertising Arbitrage (September 4, 2015). CFS Working Paper No. 482. Available at SSRN: https://ssrn.com/abstract=2509735 or http://dx.doi.org/10.2139/ssrn.2509735

Sergey Kovbasyuk

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

via Sallustiana 62
Rome, Roma 00187
Italy
393484523151 (Phone)
3484523151 (Fax)

HOME PAGE: http://www.eief.it/faculty-visitors/faculty-a-z/sergei-kovbasyuk/

Marco Pagano (Contact Author)

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

Via Cintia - Monte S. Angelo
Napoli, 80126
Italy
+39 081 675306 (Phone)
+39 081 7663540 (Fax)

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

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Einaudi Institute for Economics and Finance (EIEF)

Via Sallustiana, 62
Rome, 00187
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

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

HOME PAGE: http:/www.ecgi.org

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