This paper explores the financial stability implications of mark-to-market accounting, in particular its tendency to amplify financial cycles and the "reach for yield". Market prices play a dual role. Not only do they serve as a signal of the underlying fundamentals and the actions taken by...

This paper develops a model in which arbitrageurs are collectively unconstrained. Yet, they may prefer to incur individual limits of arbitrage rather than use their combined resources to capture every available arbitrage opportunity. Such deliberate limits to arbitrage arise because the...