Gromb, Denis and Vayanos, Dimitri (2009) Financially constrained arbitrage and cross-market contagion. Department of Finance, London School of Economics and Political Science, London, UK.
We propose a continuous time infinite horizon equilibrium model of financial markets in which arbitrageurs have multiple valuable investment opportunities but face financial constraints. The investment opportunities, heterogeneous along different dimensions, are provided by pairs of similar assets trading at different prices in segmented markets. By exploiting these opportunities, arbitrageurs alleviate the segmentation of markets, providing liquidity to other investors by intermediating their trades. We characterize the arbitrageurs’ optimal investment policy, and derive implications for market liquidity and asset prices.
|Item Type:||Monograph (Working Paper)|
|Additional Information:||© 2009 The Authors|
|Uncontrolled Keywords:||financial constraints, arbitrage, liquidity, contagion|
|Library of Congress subject classification:||H Social Sciences > HG Finance|
|Sets:||Departments > Finance|
|Date Deposited:||01 Nov 2010 12:50|
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