Limits to Arbitrage When Market Participation is Restricted

By January 23, 2021Thorsten 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

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.

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