Shleifer, Andrei, and Robert W. Vishny. “The limits of arbitrage.” (1995)

Abstract

In traditional models, arbitrage in a given security is performed by a large number of diversified investors taking small positions against its mispricing. In reality, however, arbitrage is conducted by a relatively small number of highly specialized investors who take large positions using other people’s money. 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.

One reply to “Shleifer, Andrei, and Robert W. Vishny. “The limits of arbitrage.” (1995)”

  1. “In reality, however, arbitrage is conducted by a relatively small number of highly specialized investors who take large positions using other people’s money.”

    I find that to be so true. Am I part of the problem when I load up my portfolio based on quant signals but end up having to sell them when markets/factors underperform and clients ask for their money back?

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