A Theory of Arbitrage Capital
Viral Acharya,
Hyun Song Shin and
Tanju Yorulmazer
The Review of Corporate Finance Studies, 2013, vol. 2, issue 1, 62-97
Abstract:
We present a model of equilibrium allocation of capital for arbitrage. If asset prices may fall low enough, it is profitable to carry liquid capital to acquire assets in such states. Set against this, keeping capital in liquid form entails costs in terms of foregone profitable investments. This trade-off generates occasional fire sales and limited arbitrage capital as robust phenomena. With learning-by-doing effects, arbitrage capital moves in to acquire assets only if fire sales are steep. However, once arbitrage capital finds it profitable to acquire assets, it requires similar returns elsewhere, inducing contagious fire-sale prices even for unrelated assets.
JEL-codes: D62 E58 G21 G28 G38 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (17)
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