Arbitrage Opportunities: Anatomy and Remediation

42 Pages Posted: 25 Jun 2018

See all articles by Peter Bossaerts

Peter Bossaerts

University of Cambridge

Jason Shachat

Durham University

Kuangli Xie

Southern Methodist University (SMU) - Department of Economics

Date Written: June 11, 2018


We introduce an experimental design where arbitrage opportunities emerge reliably and repeatedly. We observe significantly higher sell-side than buy-side arbitrage opportunities. We study ways to mitigate them. Relaxing margin requirements, shortsale restrictions, or both have neither statistically nor economically significant effects. Increasing competition (more participants, each with small stakes), and more impactful, participants’ stakes (few wealthy participants each with large exposures), generate large reductions in arbitrage opportunities. Hence, we advocate increased competition for small markets, and allowance for large stakes in large markets, rather than relaxation of rules on margin purchases or shortsales.

Keywords: Limits of arbitrage, Experimental asset markets, Market capitilization

JEL Classification: C92, D53, G12

Suggested Citation

Bossaerts, Peter L. and Shachat, Jason and Xie, Kuangli, Arbitrage Opportunities: Anatomy and Remediation (June 11, 2018). Available at SSRN: or

Peter L. Bossaerts

University of Cambridge ( email )

Faculty of Economics
Cambridge, CB3 9DD
United Kingdom

Jason Shachat (Contact Author)

Durham University ( email )

Durham University Business School
Mill Hill Lane
Durham, Fujian DH1 3LB
United Kingdom

Kuangli Xie

Southern Methodist University (SMU) - Department of Economics ( email )

Dallas, TX 75275
United States

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