Losing Money on Arbitrages: Optimal Dynamic Portfolio Choice in Markets with Arbitrage Opportunities

By Jun Liu, Francis A. Longstaff. 2000

340 citations recorded by the source corpus.

View Paper: https://www.semanticscholar.org/paper/94440bda754b0fede9fa4c6087b6408e0451517a

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

Citations in the corpus

Liquidity and Financial Market Runs (2002, unknown): “…bounce back can potentially introduce a source of risk (costly margin calls) that limits the aggressiveness of short positions at date 0 (see, e.g., Liu and Longstaff (2000)).9 9Rational expectations models relying on information are similarly concerned with breaking backward induction arbitrage…”
Conditional Return Smoothing in the Hedge Fund Industry (2008, background): “Investors with short or unpredictable investment horizons are undesirable from a hedge fund manager’s perspective, as they may limit her ability to exploit arbitrage opportunities or other trading strategies, as shown by Shleifer and Vishny (1997) and Liu and Longstaff (2004).”
Nonlinearity in Deviations from Uncovered Interest Parity: An Explanation of the Forward Bias Puzzle (2006, unknown): “For example, Liu and Longstaff (2004) demonstrate that, as an effect of the existence of margin requirements, it is not optimal to take unlimited positions in arbitrage and it is often optimal to take smaller positions in arbitrage than margin constraints would allow.”
Convergence trading with wealth effects: an amplification mechanism in financial markets (2001, background): “…study riskless arbitrage trading with position limits, Loewenstein and Willard (2000) study the trading of hedge funds with credit constraints, and Liu and Longstaff (2000) study a portfolio choice problem of arbitrageurs when arbitrage opportunities follow an exogenous Brownian bridge process.”
Option Strategies: Good Deals and Margin Calls (2009, unknown): “Consistent with the arguments of Shleifer and Vishny (1997) and Liu and Longstaff (2004) about the limits to arbitrage, our findings explain why the good deals in options prices have not been arbitraged away.”
Limits of Arbitrage (2010, unknown): “…15See also Yuan (2005) for a model in which leverage constraints hamper the revelation of private information, and Grossman & Vila (1992), Liu & Longstaff (2004), Jurek & Yang (2007) and Milbradt (2009) for partial-equilibrium models of portfolio choice by leverage-constrained investors.”
Market liquidity and funding liquidity (2009, unknown): “Liu and Longstaff (2004) derive the optimal dynamic arbitrage strategy under funding constraints in a setting with exogenous price process.”
Explaining Asset Pricing Puzzles Associated with the 1987 Market Crash (2011, unknown): “This literature argues that due to the existence of limits to arbitrage, market makers cannot always fully hedge their positions (see, e.g., Green and Figlewski, 1999; Figlewski, 1989; Hugonnier et al., 2005; Liu and Longstaff, 2004; Longstaff, 1995; and Shleifer and Vishny, 1997).”
The Relative Valuation of Caps and Swaptions: Theory and Empirical Evidence (2000, unknown): “Liu and Longstaff (2000) demonstrate that rational investors facing realistic margin constraints may actually choose to underinvest in arbitrages, or avoid investing in an arbitrage altogether, because of the risk that the arbitrage opportunity may widen further before it ultimately converges.”
Risk and Return in Fixed Income Arbitrage: Nickels in front of a Steamroller? (2006, unknown): “For example, Liu and Longstaff (2004) show that arbitrageurs may make larger profits when there are many small but rapidlyconverging arbitrages rather than a few large but slowly-converging arbitrages.”
Limits to arbitrage during the crisis: funding liquidity constraints and covered interest parity (2011, unknown): “Of other papers emphasizing sentiment shocks, one of the founding papers is Shleifer and Vishny (1997) and Pagano (1989), emphasizing self fulfilling prophecies.”