Arbitrage-Induced Mispricing

Woongki Lee
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Woongki Lee: Yonsei University

No u5snw_v1, SocArXiv from Center for Open Science

Abstract: Contrary to common belief, arbitrageurs and mean-variance optimizers are not direct counterparts in trading. Their portfolio positions may instead overlap, amplifying fluctuations in aggregate demand for assets with particular positioning signals and pushing prices away from fundamental values. These deviations, in turn, create additional hedging demand. This study examines whether overlap in position setting between arbitrageurs and mean-variance optimizers generates mispricing and whether this mispricing becomes a priced source of risk. The empirical findings support both possibilities: they confirm the presence of such mispricing and show that additional pricing factors are needed to account for it.

Date: 2026-08-06
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Persistent link: https://EconPapers.repec.org/RePEc:osf:socarx:u5snw_v1

DOI: 10.31235/osf.io/u5snw_v1

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