47 Pages Posted: 4 Sep 2020 Last revised: 4 Apr 2022
Date Written: April 1, 2022
An arbitrageur with short investment horizon gains from accelerating price discovery by advertising his private information. However, advertising many assets may overload investors' attention, reducing the number of informed traders per asset and slowing price discovery. So the arbitrageur optimally concentrates advertising on just a few assets, unless his trades have significant price impact. The arbitrageur's gain from advertising is increasing in the assets' mispricing and in the precision of his private information, and is decreasing in its complexity. If several arbitrageurs have private information, inefficient equilibria can arise, where substantial mispricing persists or investors' attention is overloaded.
Keywords: limits to arbitrage, advertising, price discovery, limited attention
JEL Classification: G11, G14, G2, D84
Suggested Citation: Suggested Citation