Limits of Arbitrage
Denis Gromb and
Annual Review of Financial Economics, 2010, vol. 2, issue 1, 251-275
We survey theoretical developments in the literature on the limits of arbitrage. This literature investigates how costs faced by arbitrageurs can prevent them from eliminating mispricings and providing liquidity to other investors. Research in this area is currently evolving into a broader agenda, emphasizing the role of financial institutions and agency frictions for asset prices. This research has the potential to explain so-called market anomalies and inform welfare and policy debates about asset markets. We begin with examples of demand shocks that generate mispricings, arguing that they can stem from behavioral or from institutional considerations. We next survey, and nest within a simple model, the following costs faced by arbitrageurs: (a) risk, both fundamental and nonfundamental; (b) short-selling costs; (c) leverage and margin constraints; and (d) constraints on equity capital. We finally discuss implications for welfare and policy and suggest directions for future research.
Keywords: market anomalies; liquidity; financial constraints; financial institutions (search for similar items in EconPapers)
JEL-codes: G12 G32 (search for similar items in EconPapers)
References: Add references at CitEc
Citations: View citations in EconPapers (30) Track citations by RSS feed
Downloads: (external link)
Full text downloads are only available to subscribers. Visit the abstract page for more information.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:anr:refeco:v:2:y:2010:p:251-275
Ordering information: This journal article can be ordered from
Access Statistics for this article
More articles in Annual Review of Financial Economics from Annual Reviews Annual Reviews 4139 El Camino Way Palo Alto, CA 94306, USA.
Bibliographic data for series maintained by http://www.annualreviews.org ().