Synchronization risk and delayed arbitrage

Dilip Abreu, Markus K. Brunnermeier

    Research output: Contribution to journalArticle

    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.

    Original languageEnglish (US)
    Pages (from-to)341-360
    Number of pages20
    JournalJournal of Financial Economics
    Volume66
    Issue number2-3
    DOIs
    StatePublished - 2002

    Keywords

    • Behavioral finance
    • Efficient markets hypothesis
    • Limits to arbitrage
    • Market timing
    • Synchronization risk

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics
    • Strategy and Management

    Fingerprint Dive into the research topics of 'Synchronization risk and delayed arbitrage'. Together they form a unique fingerprint.

    Cite this