• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint

Looking at the Evidence

It should come as no surprise that relatively few arbitrage opportunities have been uncovered by empirical research over the last few decades. In fact, it may surprise you that any such opportunities exist in the first place. As you will see in this section, the evidence on arbitrage opportunities is ambiguous and can be interpreted differently, depending upon your point of view. Believers in efficient markets look at the evidence and argue that markets cannot be exploited to make any money, because of transactions costs and execution problems. Those who believe that there are times when markets break down argue that the mispricing of assets can be exploited, perhaps not by all investors but by some investors in the market.

Pure Arbitrage

One way to test whether arbitrage opportunities exist is to look at how futures and options contracts are priced by the market. This, by itself, is weak evidence of arbitrage because you have to trade at these prices to make the riskless profits. The second test of arbitrage is to examine the returns of investors who claim to do arbitrage and see if they succeed.


PREVIEW

                                                                          

Not a subscriber?

Start A Free Trial


  
  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint