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Synchronization
Risk and Delayed Arbitrage
| Co-author: |
Dilip Abreu
(Princeton University) |
| Reference: |
Journal of
Financial Economics, 2002, 66, 341-360. |
| Abstract: |
We argue that arbitrage is limited
if rational traders face uncertainty about when their peers will
exploit a common arbitrage opportunity. This synchronization
risk - which is distinct from noise trader risk and
fundamental risk - arises in our model because arbitrageurs
become sequentially aware of the mispricing and they incur
holding costs. We show that rational arbitrageurs ``time the
market'' rather than correct the mispricing right away, which
leads to delayed arbitrage . The analysis suggests that
behavioral influences on prices are resistant to arbitrage in
the short and intermediate run. |
| Keywords: |
Limits to Arbitrage, Synchronization Risk, Market
Timing, Efficient Market Hypothesis, Behavioral Finance. |
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