Arbitraging Arbitrageurs

Martin E. Ruckes, Mukarram Attari and Antonio S. Mello

No 621, Econometric Society 2004 North American Winter Meetings from Econometric Society

Abstract: This paper develops a theory of strategic trading in markets with large influential arbitrageurs. If arbitrageurs are not very well-capitalized, margin requirements or capital constraints make their trades predictable. Other market participants can exploit this by trading against them. Competitors may even find it optimal to lend to arbitrageurs that are financially fragile; additional capital makes the arbitrageurs more viable, and lenders can reap profits from trading against them for a longer time. The strategic behavior of these market participants has implications for the functioning of financial markets. Strategic trading may produce significant price distortions, increase price manipulation activities, and trigger forced liquidations of large traders

Keywords: arbitrage; margin constraints (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2004-08-11
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:nawm04:621

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