Risk in dynamic arbitrage: Price effects of convergence trading

Arbeitspapier

This paper studies the adverse price effects of convergence trading. I assume two assets with identical cash flows traded in segmented markets. Initially, there is gap between the prices of the assets, because local traders’ face asymmetric temporary shocks. In the absence of arbitrageurs, the gap remains constant until a random time when the difference across local markets disappears. While arbitrageurs’ activity reduces the price gap, it also generates potential losses: the price gap widens with positive probability at each time instant. With the increase of arbitrage capital on the market, the predictability of the dynamics of the gap decreases, and the arbitrage opportunity turns into a risky speculative bet. In a calibrated example we show that the endogenously created losses alone can explain episodes when arbitrageurs lose most of their capital in a relatively short time.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: MNB Working Papers ; No. 2006/6

Klassifikation und Themen

• Klassifikation: Wirtschaft ; General Financial Markets: General (includes Measurement and Data) ; Financial Institutions and Services: General
• Thema: convergence trading ; Limits to arbitrage ; Liquidity crisis ; Arbitrage Pricing ; Allgemeines Gleichgewicht ; Theorie

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Kondor, Péter
• Ereignis: Veröffentlichung
• (wer): Magyar Nemzeti Bank
• (wo): Budapest
• (wann): 2006

Weitere Informationen

• Handle: http://hdl.handle.net/10419/83629
• Letzte Aktualisierung: 10.03.2025, 11:42 MEZ