Outsized arbitrage

Makarov, Igor ORCID: 0009-0006-7557-449X (2020) Outsized arbitrage. Financial Markets Group Discussion Papers (820). Financial Markets Group, The London School of Economics and Political Science, London, UK.

Text (DP820) - Published Version Download (982kB)

• Author
• https://www.fmg.ac.uk/publications/discu...

Abstract

The paper studies incentives and trading decisions of an arbitrageur who can take concentrated bets in an illiquid market and who cares about interim as well as long-term performance. By scaling up his position and using price impact, the arbitrageur can prop up the value of his position, helping him weather periods of low valuation and successfully complete the arbitrage. But that approach also can trap him into building an outsized arbitrage position, which can cause persistent mispricing in the market, even in the presence of other arbitrageurs, and lead to large losses to investors.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2020 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G0 - General > G00 - General
Date Deposited:	18 May 2023 23:08
Last Modified:	01 Oct 2024 04:04
URI:	http://eprints.lse.ac.uk/id/eprint/118855

Actions (login required)

View Item