Dow, J, Han, J and Sangiorgi, F (2021) Hysteresis in price efficiency and the economics of slow-moving capital. Review of Financial Studies, 34 (6). pp. 2857-2909. ISSN 0893-9454
Abstract
Will arbitrage capital flow into markets experiencing shocks, mitigating adverse effects on price efficiency? Not necessarily. In a dynamic model with privately informed capital-constrained arbitrageurs, price efficiency plays a dual role, determining both the profitability of new arbitrage and the ability to close existing positions profitably. An adverse shock to efficiency lengthens arbitrage duration, effectively reducing the amount of arbitrage capital available for new positions. If this falls below a critical mass, arbitrage capital flows out, amplifying the impact on price efficiency. This creates endogenous regimes: temporary shocks can trigger “hysteresis,” a persistent shift in price efficiency.
More Details
Item Type: | Article |
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Subject Areas: | Finance |
Additional Information: |
This is a pre-copyedited, author-produced version of an article accepted for publication in The Review of Financial Studies following peer review. The version of record: 'Hysteresis in Price Efficiency and the Economics of Slow-Moving Capital' -
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Date Deposited: | 18 Dec 2020 17:45 |
Date of first compliant deposit: | 11 Jan 2021 |
Subjects: |
Asset valuation Insider trading Bonds Speculation Learning Communication Information |
Last Modified: | 21 Nov 2024 02:33 |
URI: | https://lbsresearch.london.edu/id/eprint/1599 |