Losing money on arbitrage: Optimal dynamic portfolio choice in markets with arbitrage opportunities

• 成果类型: Article
• 署名作者: Liu, J; Longstaff, FA
• 署名单位: University of California System; University of California Los Angeles
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhg029
• 发表日期: 2004
• 页码: 611
• 关键词: Financial innovation; Margin requirements; TREASURY STRIPS; SECURED DEBT; Hedge funds; liquidity; equilibrium; constraints; securities; consumption

摘要

We derive the optimal investment policy of a risk-averse investor in a market where there is a textbook arbitrage opportunity, but where liabilities must be secured by collateral. We find that it is often optimal to underinvest in the arbitrage by taking a smaller position than collateral constraints allow. Even when the optimal policy is followed, the arbitrage portfolio typically experiences losses before the final convergence date. In fact, its initial performance may be indistinguishable from that of a conventional portfolio with a poor track record. These results have important implications for the role of arbitrageurs in financial markets.