Synchronization risk and delayed arbitrage

Citation:

Abreu, Dilip, and Markus K Brunnermeier. “Synchronization risk and delayed arbitrage”. Journal of Financial Economics 66 (2002): , 66, 341-360. Print.
synchronization_risk.pdf194 KB

Number:

2-3

Abstract:

We argue that arbitrage is limited if rational traders face uncertainty about when their peers will exploit a common arbitrage opportunity. This synchronization risk—which is distinct from noise trader risk and fundamental risk—arises in our model because arbitrageurs become sequentially aware of mispricing and they incur holding costs. We show that rational arbitrageurs “time the market” rather than correct mispricing right away. This leads to delayed arbitrage. The analysis suggests that behavioral influences on prices are resistant to arbitrage in the short and intermediate run.

Notes:

Models the Wile E. Coyote effect, since synchronization risk leads to market timing by arbitrageurs and delays arbitrage.

Last updated on 07/16/2014