Strategic Arbitrage in Segmented Markets

74 Pages Posted: 11 Dec 2022 Last revised: 17 Oct 2024

See all articles by Svetlana Bryzgalova

Svetlana Bryzgalova

London Business School - Department of Finance; Centre for Economic Policy Research (CEPR)

Anna Pavlova

London Business School; Centre for Economic Policy Research (CEPR)

Taisiya Sikorskaya

University of Chicago - Finance

Date Written: October 11, 2024

Abstract

We propose a model in which arbitrageurs act strategically in markets with entry costs. In a repeated game, arbitrageurs choose to specialize in some markets, which leads to the highest combined profits. We present evidence consistent with our theory from the options market, in which suboptimally unexercised options create arbitrage opportunities for intermediaries. Using transaction-level data, we identify the corresponding arbitrage trades. Consistent with the model, only 57% of these opportunities attract entry by arbitrageurs. Of those that do, 49% attract only one arbitrageur. Finally, our paper details how market participants circumvent a regulation devised to curtail this arbitrage strategy.

Keywords: JEL Classification: G4, G5, G11, G12 Keywords: Arbitrage, repeated game, entry cost, dividend play, retail investors

JEL Classification: G4, G5, G11, G12

Suggested Citation

Bryzgalova, Svetlana and Pavlova, Anna and Sikorskaya, Taisiya, Strategic Arbitrage in Segmented Markets (October 11, 2024). Available at SSRN: https://ssrn.com/abstract=4295297 or http://dx.doi.org/10.2139/ssrn.4295297

Svetlana Bryzgalova (Contact Author)

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Anna Pavlova

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 20 7000 8218 (Phone)

HOME PAGE: http://https://www.anna-pavlova.co.uk/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Taisiya Sikorskaya

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://sikorskaya.net

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