Limits to Arbitrage When Market Participation is Restricted

IEW Working Paper No. 176

15 Pages Posted: 7 Nov 2004

See all articles by Thorsten Hens

Thorsten Hens

University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute

P. Jean-Jacques Herings

Maastricht University

Arkadi Predtetchinski

Maastricht University - Department of Economics

Date Written: December 2003

Abstract

There is an extensive literature claiming that it is often difficult to make use of arbitrage opportunities in financial markets. This paper provides a new reason why existing arbitrage opportunities might not be seized. We consider a world with short-lived securities, no short-selling constraints and no transaction costs. We show that to exploit all existing arbitrage opportunities, traders should pay attention to all financial markets simultaneously. It gives a general result stating that failure to do so will leave some arbitrage opportunities unexploited with probability one.

Suggested Citation

Hens, Thorsten and Herings, P. Jean-Jacques and Predtetchinski, Arkadi, Limits to Arbitrage When Market Participation is Restricted (December 2003). IEW Working Paper No. 176, Available at SSRN: https://ssrn.com/abstract=491501 or http://dx.doi.org/10.2139/ssrn.491501

Thorsten Hens (Contact Author)

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

Plattenstrasse 32
Zurich, 8032
Switzerland
+41-44 634 37 06 (Phone)

Norwegian School of Economics and Business Administration (NHH)

Helleveien 30
Bergen, 5045
Norway

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

P. Jean-Jacques Herings

Maastricht University ( email )

Department of Economics
P.O. Box 616
6200 MD Maastricht
Netherlands
+31 43 3883636 (Phone)
+31 43 3884878 (Fax)

HOME PAGE: http://www.personeel.unimaas.nl/p.herings/herings.htm

Arkadi Predtetchinski

Maastricht University - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31-43-3883636 (Phone)
+31-43-3884878 (Fax)

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