Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
961084 | Journal of Financial Intermediation | 2009 | 16 Pages |
Abstract
Does the presence of arbitrageurs decrease equilibrium asset price volatility? I study an economy with arbitrageurs, informed investors, and noise traders. Arbitrageurs face a trade-off between “inference” and “arbitrage”: they would like to buy assets in response to temporary price declines-the arbitrage effect-but sell when prices decline permanently-the inference effect. In equilibrium, the presence of arbitrageurs increases volatility when the inference effect dominates the arbitrage effect. From a technical point of view, the paper offers closed form solutions to a dynamic equilibrium model with asymmetric information and non-Gaussian priors.
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Authors
Tobias Adrian,