Limits to arbitrage when market participation is restricted

There is an extensive literature claiming that it is often difficult to make use of arbitrage opportunities in financial markets. This paper provides a new reason why existing arbitrage opportunities might not be seized. We consider a world with short-lived securities, no short-selling constraints and no transaction costs. We show that to exploit all existing arbitrage opportunities, traders should pay attention to all financial markets simultaneously. The paper gives a general result stating that failure to do so will leave some arbitrage opportunities unexploited with probability one.