We consider a bank having several trading desks, each of which trades a different class of contingent claims with each desk using a different model. We assume that the models are arbitrage-free. A practical question is whether a bank using several models can be arbitraged. Surprisingly it can happen that in some cases there must be an arbitrage. We discuss conditions under which the bank trades...

At arbitrary prices of commodities and assets, fix-price equilibria exist under weak assumptions: endowments need not satisfy an interiority condition, utility functions need only satisfy a very weak monotonicity requirement, and the asset return matrix allows for redundant assets. Prices of assets may permit arbitrage. At equilibrium, though restricted through endogenously determined trading c...

In this paper we study the computational problem of arbitrage in a frictional market with a finite number of bonds and finite and discrete times to maturity. Types of frictions under consideration include fixed and proportional transaction costs, bid-ask spreads, taxes, and upper bounds on the number of units for transaction. We obtain some negative result on computational difficulty in general...

In the context of a general continuous financial market model, we study whether the additional information associated with an honest time τ gives rise to arbitrage profits. By relying on the theory of progressive enlargement of filtrations, we explicitly show that arbitrage profits can never be realized strictly before τ, while classical arbitrage opportunities can be realized exactly at τ and ...

A recently proposed model (by Ilinski et al.) for the dynamics of intermediate deviations from equilibrium of financial markets ( “virtual” arbitrage returns) is incorporated within an equilibrium (arbitrage-free) pricing method for derivatives on securities (e.g. stocks) using an equivalence to option pricing theory with stochastic interest rates. Making the arbitrage return a component of a f...

Herein we further explore whether the power of arbitrage to induce people to exhibit more rational behavior extends to diverse decision-making tasks and stated valuation over preferences for gambles. We examine how arbitrage in a preference reversal setting affects behavior for the valuation of low probability food safety risks, the Allais Paradox, and the Ellsberg paradox. We design a three-st...

Although tax arbitrage is central to the literatures on tax capitalization, implicit taxes, and even capital structure, there is little empirical evidence of the extent to which firms actually engage in tax arbitrage. This paper provides some evidence on the topic by focusing on a simple and observable corporate arbitrage strategy in the market for municipal bonds. It poses a puzzle for the lit...

A natural liquidity mismatch emerges when liquid exchange traded funds (ETFs) hold relatively illiquid assets. We provide a theory and empirical evidence showing that this liquidity mismatch can reduce market efficiency and increase the fragility of these ETFs. We focus on corporate bond ETFs and examine the role of authorized participants (APs) in ETF arbitrage. In addition to their role as de...

Urban economists understand housing prices with a spatial equilibrium approach that assumes people must be indifferent across locations. Since the spatial no arbitrage condition is inherently imprecise, other economists have turned to other no arbitrage conditions, such as the prediction that individuals must be indifferent between owning and renting. This paper argues these non-spatial, no arb...