The Value of Arbitrage

Eduardo Davila, Daniel D. Graves and Cecilia Parlatore

No 29744, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the social value of closing price differentials in financial markets. We show that arbitrage gaps (price differentials between markets) exactly correspond to the marginal social value of executing an arbitrage trade. We further show that arbitrage gaps and measures of price impact are sufficient to compute the total social value from closing an arbitrage gap. Theoretically, we show that, for a given arbitrage gap, the total social value of arbitrage is higher in more liquid markets. We apply our framework to compute the welfare gains from closing arbitrage gaps in the context of covered interest parity violations and several dual-listed companies. The estimates of the value of closing arbitrage gaps vary substantially across applications.

JEL-codes: D61 G12 G18 (search for similar items in EconPapers)
Date: 2022-02
New Economics Papers: this item is included in nep-ban and nep-cwa
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Published as Eduardo Dávila & Daniel Graves & Cecilia Parlatore, 2024. "The Value of Arbitrage," Journal of Political Economy, vol 132(6), pages 1947-1993.

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Working Paper: The Value of Arbitrage (2022)
Working Paper: The Value of Arbitrage (2022)
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