Portal de Periódicos da CAPES

Arbitrage Chains

1994; Wiley; Volume: 49; Issue: 3 Linguagem: Inglês

10.2307/2329208

1540-6261

James Dow, Gary Gorton,

Complex Systems and Time Series Analysis

The Journal of FinanceVolume 49, Issue 3 p. 819-849 Article Arbitrage Chains JAMES DOW, JAMES DOWSearch for more papers by this authorGARY GORTON, GARY GORTON Dow is from London Business School, and Gorton is from the Wharton School of the University of Pennsylvania. We thank Bruno Biais, Sam Orez, Jean-Charles Rochet, and Jose Scheinkman for helpful discussions.Search for more papers by this author JAMES DOW, JAMES DOWSearch for more papers by this authorGARY GORTON, GARY GORTON Dow is from London Business School, and Gorton is from the Wharton School of the University of Pennsylvania. We thank Bruno Biais, Sam Orez, Jean-Charles Rochet, and Jose Scheinkman for helpful discussions.Search for more papers by this author First published: July 1994 https://doi.org/10.1111/j.1540-6261.1994.tb00080.xCitations: 106 Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Abstract A privately informed trader will engage in costly arbitrage, that is, trade on his knowledge that the price of an asset is different from the fundamental value if: (1) his order does not move the price immediately to reflect the information; and (2) he can hold the asset until the date when the information is reflected in the price. We study a general equilibrium model in which all agents optimize. In each period, there may be a trader with a limited horizon who has private information about a distant event. Whether he acts on his information, and whether subsequent informed traders act, is shown to depend on the possibility of a sequence or chain of future informed traders spanning the event date. An arbitrageur who receives good news will buy only if it is likely that, at the end of his trading horizon, a subsequent arbitrageur's buying will have pushed up the expected price. We show that limited trading horizons result in inefficient prices, because informed traders do not act on their information until the event date is sufficiently close. We also show that limited horizons can arise because of the cost-carry associated with holding an arbitrage portfolio over an extended period of time. Citing Literature Volume49, Issue3July 1994Pages 819-849 RelatedInformation