Financially Constrained Strategic Arbitrage

Aytek Malkhozov, Gyuri Venter

Publikation: KonferencebidragPaperForskningpeer review

Resumé

We develop an equilibrium model of strategic trading under financial constraints. Investors have access to a fundamentally riskless arbitrage opportunity, but may be forced to re-sell if their capital does not fully cover their losses. Investors internalize both their price impact and the e⁄ffect of price movements on the constraints of all market participants, giving rise to a strategic motive for the less exposed investors to induce re-sales of more exposed ones. Ex ante, the presence of predatory risk leads to lower investment by all traders. We show the implications of strategic trading on price dynamics, returns characteristics, and leverage cross-section and dynamics.
OriginalsprogEngelsk
Publikationsdato2020
Antal sider44
StatusUdgivet - 2020
BegivenhedThe 80th Annual Meeting of American Finance Association. AFA 2020 - San Diego, USA
Varighed: 3 jan. 20205 jan. 2020
Konferencens nummer: 80
https://afajof.org/annual-meeting/

Konference

KonferenceThe 80th Annual Meeting of American Finance Association. AFA 2020
Nummer80
LandUSA
BySan Diego
Periode03/01/202005/01/2020
Internetadresse

Emneord

  • Limits to arbitrage
  • Liquidity
  • Wealth e⁄ffects
  • Strategic trading
  • Endogenous risk

Citer dette

Malkhozov, A., & Venter, G. (2020). Financially Constrained Strategic Arbitrage. Afhandling præsenteret på The 80th Annual Meeting of American Finance Association. AFA 2020, San Diego, USA.
Malkhozov, Aytek ; Venter, Gyuri. / Financially Constrained Strategic Arbitrage. Afhandling præsenteret på The 80th Annual Meeting of American Finance Association. AFA 2020, San Diego, USA.44 s.
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Malkhozov, A & Venter, G 2020, 'Financially Constrained Strategic Arbitrage' Paper fremlagt ved The 80th Annual Meeting of American Finance Association. AFA 2020, San Diego, USA, 03/01/2020 - 05/01/2020, .

Financially Constrained Strategic Arbitrage. / Malkhozov, Aytek; Venter, Gyuri.

2020. Afhandling præsenteret på The 80th Annual Meeting of American Finance Association. AFA 2020, San Diego, USA.

Publikation: KonferencebidragPaperForskningpeer review

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T1 - Financially Constrained Strategic Arbitrage

AU - Malkhozov, Aytek

AU - Venter, Gyuri

PY - 2020

Y1 - 2020

N2 - We develop an equilibrium model of strategic trading under financial constraints. Investors have access to a fundamentally riskless arbitrage opportunity, but may be forced to re-sell if their capital does not fully cover their losses. Investors internalize both their price impact and the e⁄ffect of price movements on the constraints of all market participants, giving rise to a strategic motive for the less exposed investors to induce re-sales of more exposed ones. Ex ante, the presence of predatory risk leads to lower investment by all traders. We show the implications of strategic trading on price dynamics, returns characteristics, and leverage cross-section and dynamics.

AB - We develop an equilibrium model of strategic trading under financial constraints. Investors have access to a fundamentally riskless arbitrage opportunity, but may be forced to re-sell if their capital does not fully cover their losses. Investors internalize both their price impact and the e⁄ffect of price movements on the constraints of all market participants, giving rise to a strategic motive for the less exposed investors to induce re-sales of more exposed ones. Ex ante, the presence of predatory risk leads to lower investment by all traders. We show the implications of strategic trading on price dynamics, returns characteristics, and leverage cross-section and dynamics.

KW - Limits to arbitrage

KW - Liquidity

KW - Wealth e⁄ffects

KW - Strategic trading

KW - Endogenous risk

KW - Limits to arbitrage

KW - Liquidity

KW - Wealth e⁄ffects

KW - Strategic trading

KW - Endogenous risk

M3 - Paper

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Malkhozov A, Venter G. Financially Constrained Strategic Arbitrage. 2020. Afhandling præsenteret på The 80th Annual Meeting of American Finance Association. AFA 2020, San Diego, USA.