I generalize the textbook arbitrage-pricing framework to characterize how uninformative flows generate price impacts. The modeled channel is that price impacts arise as marginal investors' risk compensation. I build a new model of price impacts that allows for common factors of flows and common...

How can we assess whether macro-prudential regulations are having their intended effects? If these regulations are optimal, their marginal benefit of addressing externalities should equal their marginal cost of distorting risk-sharing. These risk-sharing distortions will manifest as trading...

‘’Blockchain’’ is often described as a technology that allows the prevention of conflicts. The code is thus presumed to accurately execute the will of the parties. However, blockchain technology supports economic and social interactions between humans and, as in any social environment,...

Trading algorithms are an integral component of modern asset markets. In two experimental markets for long-lived correlated assets we examine the impact of alternative types of arbitrage-seeking algorithms. These arbitrage robot traders vary in their latency and whether they make or take market...

The article describes a global and arbitrage-free parametrization of the eSSVI surfaces introduced by Hendriks and Martini in 2019. A robust calibration of such surfaces has already been proposed by the quantitative research team at Zeliade in 2019, but it is sequential in expiries and lacks of...

Theory suggests that traders will be more reluctant to trade on negative private information about an ongoing merger if their trading will cause the merger to be canceled. This paper provides evidence on the existence of such endogenous limits to arbitrage and it's consequence on the...

Focusing on capital asset returns governed by a factor structure, the Arbitrage Pricing Theory (APT) is a one-period model, in which preclusion of arbitrage over static portfolios of these assets leads to a linear relation between the expected return and its covariance with the factors. The APT,...

The prices of exchange-traded funds (ETFs) can deviate significantly from their net asset values (NAVs). Exploiting such inefficiencies is often too costly because it involves taking positions in hundreds of underlying illiquid securities. We develop a method that identifies a liquid mimicking...

Algorithmic trading, so popular nowadays, uses many strategies that are algorithmizable and promise profitability. This research answers the question whether it is possible to successfully use a convexity arbitrage strategy in a bond portfolio in financial practice. It should provide a positive...

In a one price economy, the Fundamental Theorem of Asset Pricing (FTAP) establishes that no-arbitrage is equivalent to the existence of an equivalent martingale measure. Such an equivalent measure can be derived as the normal unit vector of the hyperplane that separates the attainable gain...

This paper examines the implications of pricing errors and factors that are not strong for the Fama-MacBeth two-pass estimator of risk premia and its asymptotic distribution when T is fixed with n → ∞, and when both n and T → ∞, jointly. While the literature just distinguishes strong and...

The arbitrage pricing theory (APT) attributes differences in expected returns to exposure to systematic risk factors, which are typically assumed to be strong. In this paper we consider two aspects of the APT. Firstly we relate the factors in the statistical factor model to a theoretically...

Purpose - Nowadays popular algorithmic trading uses many strategies which are algoritmizable and promise profitability. This research assess if it is possible successfully use interest rates sensitivity arbitrage in bond portfolio (also known as convexity arbitrage) in financial praxis. This...

Modelling joint dynamics of liquid vanilla options is crucial for arbitrage-free pricing of illiquid derivatives and managing risks of option trade books. This paper develops a nonparametric model for the European options book respecting underlying financial constraints and while being...

The arbitrage pricing theory (APT) attributes differences in expected returns to exposure to systematic risk factors, which are typically assumed to be strong. In this paper we consider two aspects of the APT. Firstly we relate the factors in the statistical factor model to a theoretically...

I show that an important no-arbitrage consistent but costly collateral rental yield contributes to about two-thirds of the standard CIP violations. I measure this yield using two approaches applied to short- and long-term CIP horizons. First, I assume that the yield is observable and proxy it...

Classical wealth management heavily relies on the linear and two-dimensional world of Modern Portfolio Theory. While this has generally worked for investors, many new investment offerings only inadequately map into the CW world. This inadequacy is a source of potentially large investor losses,...

The European Union's push towards market-based procurement of redispatch services has sparked fears of so called Inc-Dec-Gaming, i.e. the incentive to engage in arbitrage between the national wholesale market and the local redispatch market. The latter would increase both likelihood and severity...

This study applies the Caginalp & Balenovic (1999) model for asset flow dynamics to fully collateralized stablecoins. The analysis provides novel insights on how trend-reversion and reactions to peg deviations work together to keep stablecoin prices close to the price they are targeting. A...

We study the dynamics of cash-and-carry arbitrage using the U.S. crude oil market. Sizable arbitrage-related inventory movements occur at the NYMEX futures contract delivery point but not at other storage locations where, instead, operational factors explain most inventory changes. We add to the...

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...

The Svensson generalization of the popular Nelson-Siegel term structure model is widely used by practitioners and central banks. Unfortunately, like the original Nelson-Siegel specification, this generalization, in its dynamic form, does not enforce arbitrage-free consistency over time. Indeed,...

The no Butterfly arbitrage domain of Gatheral SVI 5-parameters formula for the volatility smile has been recently described. It requires in general a numerical minimization of 2 functions altogether with a few root finding procedures. We study here the case of some sub-SVIs (all with 3...

This study outlines an affine term structure model (ATSM) of TIPS that decomposes yields into real expected rates, real term premiums, and liquidity premiums. The estimation incorporates an observable liquidity factor that more comprehensively captures limits to arbitrage implied by yield curve...

This paper studies the implications of arbitrage in a large asset market under conditions of (Knightian) uncertainty.First, I adapt the notion of arbitrage to a market in which the assets' returns are affected by uncertainty across probability distributions. The setting delivers the analog of...

A central conjecture of behavioural finance is that arbitrage opportunities appear as a result of systematic irrational investment behaviour and persist since real-world arbitrage trades actually involve costs and risks due to market frictions and non-fundamental risk. This paper shows that the...

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is considered by many market participants as a common measure of market risk and investors' sentiment, representing the market's expectation of the 30-day-ahead looking implied volatility obtained from real-time prices of options...

We investigate whether transaction costs, arbitrage risk, and short-sale constraints explain the abnormal returns of volatility-managed equity portfolios. Even using five cost-mitigation strategies, after accounting for transaction costs, volatility management of common asset-pricing factors...

To understand deviations from Covered Interest Parity (CIP) it is crucial to account for heterogeneity in funding costs---both across banks and currency areas. For most market participants, the no-arbitrage relation holds fairly well when implemented using marginal funding costs and risk-free...

Non-fundamental demand shocks have significant effects on asset prices, but observing these shocks is challenging. We use the exchange traded fund (ETF) primary market to study non-fundamental demand. Unique to the ETF market, specialized arbitrageurs called authorized participants correct...

We develop a framework for computing the total valuation adjustment (XVA) of a European claim accounting for funding costs, counterparty credit risk, and collateralization. Based on no-arbitrage arguments, we derive backward stochastic differential equations (BSDEs) associated with the...

We examine the consistency of several prominent multifactor models from the empirical asset pricing literature with the Arbitrage Pricing Theory (APT) framework. We follow the APT-related literature and estimate the common factor structure from a rich cross-section (associated with 42 major CAPM...

We analyze a model of anomaly discovery and test its new predictions on both asset prices and arbitrageurs' trading. Consistent with existing evidence, the discovery of an anomaly reduces its magnitude and increases its correlation with other anomalies. Using 99 anomalies, we test the new...

Arbitrageurs with a short investment horizon gain from accelerating price discoveryby advertising their private information. However, advertising many assets mayoverload investors' attention, reducing the number of informed traders per assetand slowing price discovery. So arbitrageurs optimally...

Slow-moving capital cannot fully explain the 2005 and 2008 arbitrage crashes in theconvertible bond market. Faced with depressed convertible bond prices implying negative option values, some investors continued to buy strictly dominated straight bonds from the same issuers. This finding suggests...

I study how arbitrage affects liquidity by analyzing several billion trades in the AmericanDepositary Receipt (ADR) market from 2001 to 2016. Price deviations persist, on average, for 12 minutes, and mainly arise because of price pressure. Impulse response functions estimated at 1-minute...

This paper applied the multi factor Arbitrage Pricing Theory to explore the relationship between investment performance and selected macroeconomic variables in the Nigerian Capital market. Thus, the general purpose was to test the applicability of the Arbitrage Pricing Theory on investment...

We use a no-arbitrage term structure model of equity yields computed from the prices of dividend swaps to estimate the yields on hypothetical bonds with cash-flows indexed to the level of US GDP. This provides a novel approach for estimating the possible relative cost of conventional and...

Rational frictionless asset pricing models imply that inflation swap rates and break-even inflation rates with same maturity must be equal. The data, however, suggest a persistent positive difference between these two quantities, which the literature attributes to mispricing of Treasury...

This paper describes a new parametric volatility surface that is arbitrage free, extremely rich and flexible, and has closed-form expressions for both European option values and local volatilities. Our surface is based on the work of Carr and Pelts, for which we provide a simple derivation and a...