Synchronization risk and delayed arbitrage

Research output: Contribution to journalArticle

149 Scopus citations

Abstract

We argue that arbitrage is limited if rational traders face uncertainty about when their peers will exploit a common arbitrage opportunity. This synchronization risk-which is distinct from noise trader risk and fundamental risk-arises in our model because arbitrageurs become sequentially aware of mispricing and they incur holding costs. We show that rational arbitrageurs "time the market"rather than correct mispricing right away. This leads to delayed arbitrage. The analysis suggests that behavioral influences on prices are resistant to arbitrage in the short and intermediate run.

Original languageEnglish (US)
Pages (from-to)341-360
Number of pages20
JournalJournal of Financial Economics
Volume66
Issue number2-3
DOIs
StatePublished - 2002

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Keywords

  • Behavioral finance
  • Efficient markets hypothesis
  • Limits to arbitrage
  • Market timing
  • Synchronization risk

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