A Theory of Arbitrage Capital

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Oxford Journals Contact Us My Basket My Account Review of Corporate Finance Studies About This Journal Contact This Journal Subscriptions View Current Issue (Volume 2 Issue 1 March 2013) Archive Search Oxford Journals EconomicsSocial Sciences Review of Corporate Finance Studies Volume 2 Issue 1 Pp. 62-97. A Theory of Arbitrage Capital Viral V. Acharya

NYU-Stern, CEPR, and NBER Hyun Song Shin

Princeton University Tanju Yorulmazer

Federal Reserve Bank of New York Send correspondence to Viral Acharya, Department of Finance, Stern School of Business, New York University, 44 West 4th Street, Room 9-84, New York, NY 10012, USA; telephone: (212) 998-0354. E-mail: vacharya{at}stern.nyu.edu. Abstract We present a model of equilibrium allocation of capital for arbitrage. If asset prices may fall low enough, it is profitable to carry liquid capital to acquire assets in such states. Set against this, keeping capital in liquid form entails costs in terms of foregone profitable investments. This trade-off generates occasional fire sales and limited arbitrage capital as robust phenomena. With learning-by-doing effects, arbitrage capital moves in to acquire assets only if fire sales are steep. However, once arbitrage capital finds it profitable to acquire assets, it requires similar returns elsewhere, inducing contagious fire-sale prices even for unrelated assets. (JEL G21, G28, G38, E58, D62)

© The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com. « Previous Table of Contents This Article Review of Corporate Finance Studies (2013) 2 (1): 62-97. doi: 10.1093/rcfs/cfs006 First published online: January 18, 2013 » Abstract Full Text (HTML) Full Text (PDF) All Versions of this Article: cfs006v1 2/1/62 most recent Classifications Articles Services Alert me when cited Alert me if corrected Find similar articles Similar articles in Web of Science Add to my archive Download citation Request Permissions Citing Articles Load citing article information Citing articles via CrossRef Citing articles via Scopus Citing articles via Web of Science Google Scholar Articles by Acharya, V. V. Articles by Yorulmazer, T. Related Content Load related web page information Share Email this article CiteULike Delicious Facebook Google+ Mendeley Twitter What's this?

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