Arbitrage Opportunity Set and the Role of Corporations

James S. Ang () and Yingmei Cheng ()
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James S. Ang: College of Business, Florida State University
Yingmei Cheng: Florida State University

Chapter 57 in Encyclopedia of Finance, 2022, pp 1317-1344 from Springer

Abstract: Abstract We show that capital asset markets are made more efficient when investors and corporations could both engage in arbitrage. Previously known limits to arbitrage by investors are mitigated by explicitly recognizing the role of corporations as arbitragers. We derive the equilibrium regimes in which the dominant arbitrageurs in the capital markets are the investors, the corporations, both, or neither. Corporations enlarge the arbitrage opportunity set as they have several unique properties that could not be replicated by investors as arbitragers. We suggest that the desire to exploit arbitrage opportunities infeasible to investors could provide a new explanation for the formation of corporations.

Keywords: Corporate arbitrage; Investor arbitrage; Limits to arbitrage (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/978-3-030-91231-4_57

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