Execution Risk in High-Frequency Arbitrage

• 成果类型: Article
• 署名作者: Kozhan, Roman; Tham, Wing Wah
• 署名单位: University of Warwick; Erasmus University Rotterdam - Excl Erasmus MC; Erasmus University Rotterdam
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.1120.1541
• 发表日期: 2012
• 页码: 2131-2149
• 关键词: execution risk; limit to arbitrage; liquidity; high-frequency trading strategies

摘要

In this paper, we investigate the role of execution risk in high-frequency trading through arbitrage strategies. We show that if rational agents face uncertainty about completing their arbitrage portfolios, then arbitrage is limited even in markets with perfect substitutes and convertibility. Using a simple model, we demonstrate that this risk arises from the crowding effect of competing arbitrageurs entering the same trade and inflicting negative externalities on each other. Our empirical results provide evidence that support the relevance of execution risk in high-frequency arbitrage.