Arbitrage and endogenous market integration

Zigrand, Jean-Pierre ORCID: 0000-0002-7784-4231 (1999) Arbitrage and endogenous market integration. Financial Markets Group Discussion Papers (319). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We analyze a general equlibrium model of strategic arbitraging and intermediation. Arbitrageurs take advantage of mispricings, market frictions and manipulation opportunities in order to maximize profits. We analyze the effects of increased competition among arbitrageurs due to lower entry costs. Typically, markets become more liquid and integrated, and Cournot-Walras equilibria converge to Walrasian equilibria, though not uniformly: mispricings persist longer on shallow markets. We also provide a class of economies where the limiting equilibria are neither integrated nor Walrasian. Furthermore, we show that the asset pricing implications for financial innovations are quite different from standard models.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 1999 The Author(s)
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G2 - Financial Institutions and Services > G20 - General D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets
Date Deposited:	04 Jul 2023 14:03
Last Modified:	16 May 2024 12:30
URI:	http://eprints.lse.ac.uk/id/eprint/119127

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