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 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.
Original languageEnglish
Publication date2020
Number of pages44
Publication statusPublished - 2020
EventThe 80th Annual Meeting of American Finance Association. AFA 2020 - San Diego, United States
Duration: 3 Jan 20205 Jan 2020
Conference number: 80
https://afajof.org/annual-meeting/

Conference

ConferenceThe 80th Annual Meeting of American Finance Association. AFA 2020
Number80
CountryUnited States
CitySan Diego
Period03/01/202005/01/2020
Internet address

Keywords

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

Cite this

Malkhozov, A., & Venter, G. (2020). Financially Constrained Strategic Arbitrage. Paper presented at The 80th Annual Meeting of American Finance Association. AFA 2020, San Diego, United States.
Malkhozov, Aytek ; Venter, Gyuri. / Financially Constrained Strategic Arbitrage. Paper presented at The 80th Annual Meeting of American Finance Association. AFA 2020, San Diego, United States.44 p.
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Malkhozov, A & Venter, G 2020, 'Financially Constrained Strategic Arbitrage' Paper presented at, San Diego, United States, 03/01/2020 - 05/01/2020, .

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

2020. Paper presented at The 80th Annual Meeting of American Finance Association. AFA 2020, San Diego, United States.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

T1 - Financially Constrained Strategic Arbitrage

AU - Malkhozov, Aytek

AU - Venter, Gyuri

PY - 2020

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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 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

ER -

Malkhozov A, Venter G. Financially Constrained Strategic Arbitrage. 2020. Paper presented at The 80th Annual Meeting of American Finance Association. AFA 2020, San Diego, United States.