Financially Constrained Strategic Arbitrage

Aytek Malkhozov, Gyuri Venter

Research output: Contribution to conferencePaperResearchpeer-review


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


ConferenceThe 80th Annual Meeting of American Finance Association. AFA 2020
Country/TerritoryUnited States
CitySan Diego
Internet address


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

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