Arbitrage Opportunities: Anatomy and Remediation
42 Pages Posted: 25 Jun 2018
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: Suggested Citation