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Limited Arbitrage in Equity Markets

Harvard Business School Working Paper No. 01-069

HBS Finance Working Paper No. 01-069

43 Pages Posted: 1 May 2001  

Mark L. Mitchell

AQR Capital Management, LLC; CNH Partners

Todd C. Pulvino

AQR Capital Management, LLC; CNH Partners

Erik Stafford

Harvard Business School - Finance Unit

Date Written: October 2000

Abstract

This paper examines the impediments to arbitrage in 82 situations between 1985 and 2000, where the market value of a company is less than the sum of its publicly traded parts. These situations suggest clear arbitrage opportunities and provide an ideal setting in which to study the risks and market frictions that prevent arbitrageurs from immediately forcing prices to fundamental values. We find that 30% of the situations terminate without converging. Furthermore, because of forced liquidation to satisfy capital requirements, we estimate that the returns to a specialized arbitrageur would be 50% larger if the path to convergence was smooth rather than as observed. Uncertainty about the distribution of returns and characteristics of the risks appear to be an important obstacle.

JEL Classification: G10, G12, G14

Suggested Citation

Mitchell, Mark L. and Pulvino, Todd C. and Stafford, Erik, Limited Arbitrage in Equity Markets (October 2000). Harvard Business School Working Paper No. 01-069; HBS Finance Working Paper No. 01-069. Available at SSRN: https://ssrn.com/abstract=267998 or http://dx.doi.org/10.2139/ssrn.267998

Mark L. Mitchell

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

CNH Partners ( email )

Two Greenwich Plaza
1st Floor
Greenwich, CT 06830
United States
(203) 742-3001 (Phone)

Todd C. Pulvino

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

CNH Partners ( email )

2 Greenwich Plaza
1st Floor
Greenwich, CT 06830
United States
203-742-3002 (Phone)
203-742-3072 (Fax)

Erik Stafford (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-8064 (Phone)
617-496-7357 (Fax)

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