Financially Constrained Strategic Arbitrage

Aytek Malkhozov, Gyuri Venter

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

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 fire-sell if their capital does not fully cover their losses. Investors internalize both their price impact and the effect of price movements on the constraints of all market participants, giving rise to a strategic motive for the less exposed investors to induce fire-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.
Original languageEnglish
Publication date2019
Number of pages44
Publication statusPublished - 2019
Event2019 China International Conference in Finance - Sofitel Guangzhou Sunrich, Guangzhou, China
Duration: 9 Jul 201912 Jul 2019
http://www.cicfconf.org/

Conference

Conference2019 China International Conference in Finance
LocationSofitel Guangzhou Sunrich
CountryChina
CityGuangzhou
Period09/07/201912/07/2019
Internet address

Keywords

  • Limits to arbitrage
  • Liquidity
  • Wealth effects
  • Strategic trading
  • Endogenous risk

Cite this

Malkhozov, A., & Venter, G. (2019). Financially Constrained Strategic Arbitrage. Paper presented at 2019 China International Conference in Finance, Guangzhou, China.
Malkhozov, Aytek ; Venter, Gyuri. / Financially Constrained Strategic Arbitrage. Paper presented at 2019 China International Conference in Finance, Guangzhou, China.44 p.
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Malkhozov, A & Venter, G 2019, 'Financially Constrained Strategic Arbitrage' Paper presented at, Guangzhou, China, 09/07/2019 - 12/07/2019, .

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

2019. Paper presented at 2019 China International Conference in Finance, Guangzhou, China.

Research output: Contribution to conferencePaperResearchpeer-review

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T1 - Financially Constrained Strategic Arbitrage

AU - Malkhozov, Aytek

AU - Venter, Gyuri

PY - 2019

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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 fire-sell if their capital does not fully cover their losses. Investors internalize both their price impact and the effect of price movements on the constraints of all market participants, giving rise to a strategic motive for the less exposed investors to induce fire-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 fire-sell if their capital does not fully cover their losses. Investors internalize both their price impact and the effect of price movements on the constraints of all market participants, giving rise to a strategic motive for the less exposed investors to induce fire-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 effects

KW - Strategic trading

KW - Endogenous risk

KW - Limits to arbitrage

KW - Liquidity

KW - Wealth effects

KW - Strategic trading

KW - Endogenous risk

M3 - Paper

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Malkhozov A, Venter G. Financially Constrained Strategic Arbitrage. 2019. Paper presented at 2019 China International Conference in Finance, Guangzhou, China.