Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/102956
Authors: 
Kovbasyuk, Sergei
Pagano, Marco
Year of Publication: 
2014
Series/Report no.: 
CFS Working Paper Series 482
Abstract: 
Speculators often advertise arbitrage opportunities in order to persuade other investors and thus accelerate the correction of mispricing. We show that in order to minimize the risk and the cost of arbitrage an investor who identifies several mispriced assets optimally advertises only one of them, and overweights it in his portfolio; a risk-neutral arbitrageur invests only in this asset. The choice of the asset to be advertised depends not only on mispricing but also on its "advertisability" and accuracy of future news about it. When several arbitrageurs identify the same arbitrage opportunities, their decisions are strategic complements: they invest in the same asset and advertise it. Then, multiple equilibria may arise, some of which inefficient: arbitrageurs may correct small mispricings while failing to eliminate large ones. Finally, prices react more strongly to the ads of arbitrageurs with a successful track record, and reputation-building induces high-skill arbitrageurs to advertise more than others.
Subjects: 
limits to arbitrage
advertising
price discovery
limited attention
JEL: 
G11
G14
G2
D84
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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