The Limits of Arbitrage

Shleifer, Andrei; Vishny, Robert W.

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The Limits of Arbitrage

J. OF FINANCE, Vol. 52 No. 1, March 1997

Posted: 16 Jan 1997

See all articles by Andrei Shleifer

Andrei Shleifer

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Robert W. Vishny

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

There are 2 versions of this paper

Abstract

Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other peoples' capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them.

JEL Classification: G12, G14, G13

Suggested Citation: Suggested Citation

Shleifer, Andrei and Vishny, Robert W., The Limits of Arbitrage. J. OF FINANCE, Vol. 52 No. 1, March 1997, Available at SSRN: https://ssrn.com/abstract=8043