Anything is Possible: On the Existence and Uniqueness of Equilibria in the Shleifer-Vishny Model of Limits of Arbitrage

Lutz Arnold ()

Review of Finance, 2009, vol. 13, issue 3, 521-553

Abstract: This paper characterizes equilibria in the Shleifer-Vishny model of limits of arbitrage. To prove existence, one has to consider types of equilibria ignored by Shleifer and Vishny, even if one adopts their parameter restrictions. For example, the only equilibrium may be one in which maximization of expected wealth requires an "all-or-nothing" investment strategy, with intermediate investment levels being strictly unprofitable. If one goes beyond Shleifer and Vishny's parameter restrictions, multiple equilibria may arise, and equilibrium selection may be governed by sunspots. Moreover, there may exist an equilibrium in which the asset price returns to fundamentals despite worsening noise trader sentiment. Copyright 2009, Oxford University Press.

Date: 2009
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://hdl.handle.net/10.1093/rof/rfn016 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Anything is Possible: On the Existence and Uniqueness of Equilibria in the Shleifer-Vishny Model of Limits of Arbitrage (2009)
Working Paper: Anything is Possible: On the Existence and Uniqueness of Equilibria in the Shleifer-Vishny Model of Limits of Arbitrage (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:revfin:v:13:y:2009:i:3:p:521-553

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

Review of Finance is currently edited by Marcin Kacperczyk

More articles in Review of Finance from European Finance Association Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().