Fast and Slow Arbitrageurs: Implications for Return Predictability

70 Pages Posted: 10 Jan 2022

See all articles by Zhongjin Lu

Zhongjin Lu

University of Georgia - Department of Finance

Steven G. Malliaris

University of Georgia - Department of Banking and Finance

Zhongling Qin

Auburn University - Department of Finance

Date Written: January 8, 2022

Abstract

We present a model to explain puzzling patterns surrounding cross-sectional night-minus-day return predictabilities. Heterogeneous (“fast” and “slow”) arbitrageurs with offsetting advantages endogenously become the marginal investor at different times of day. Consistent with our model, we find that predictable night-minus-day returns are associated with persistent (rather than mean-reverting) order imbalances and with price deviations at open (rather than at close). Larger expected order imbalances lead to larger night-minus-day returns, except among stocks traded overseas before the U.S. market open. Fast arbitrageurs' capital constraints predict night-minus-day returns but not close-to-close returns, while the opposite is true for slow arbitrageurs' constraints.

Keywords: Fast and slow arbitrageurs, return predictability, night-minus-day returns, endogenous limited participation, tug of war

JEL Classification: G12, G14, G23

Suggested Citation

Lu, Zhongjin and Malliaris, Steven G. and Qin, Zhongling, Fast and Slow Arbitrageurs: Implications for Return Predictability (January 8, 2022). Available at SSRN: https://ssrn.com/abstract=4004609 or http://dx.doi.org/10.2139/ssrn.4004609

Zhongjin Lu

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6254
United States

Steven G. Malliaris (Contact Author)

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Zhongling Qin

Auburn University - Department of Finance ( email )

Harbert College of Business
Auburn, AL 36849
United States

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