Shleifer is from Harvard University and Vishny is from The University of Chicago. Nancy Zimmerman and Gabe Sunshine have helped us to understand arbitrage. We thank Yacine Aït Sahalia, Douglas Diamond, Oliver Hart, Steve Kaplan, Raghu Rajan, Jésus Saa-Requejo, Luigi Zingales, Jeff Zwiebel, and especially Matthew Ellman, Gustavo Nombela, René Stulz, and an anonymous referee for helpful comments.
The Limits of Arbitrage
Article first published online: 18 APR 2012
1997 The American Finance Association
The Journal of Finance
Volume 52, Issue 1, pages 35–55, March 1997
How to Cite
Shleifer, A. and Vishny, R. W. (1997), The Limits of Arbitrage. The Journal of Finance, 52: 35–55. doi: 10.1111/j.1540-6261.1997.tb03807.x
- Issue published online: 18 APR 2012
- Article first published online: 18 APR 2012
Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people's capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them.