Risky arbitrage, limits of arbitrage, and nonlinear adjustment in the dividend-price ratio

Liam A. Gallagher; Mark P. Taylor

doi:10.1093/ei/39.4.524

Risky arbitrage, limits of arbitrage, and nonlinear adjustment in the dividend-price ratio

Liam A. Gallagher
, Mark P. Taylor

Research output: Contribution to journal › Article › peer-review

40 Scopus citations

Abstract

We provide a simple test of two alternative views of arbitrage activity: the risky arbitrage hypothesis and the limits of arbitrage hypothesis. For the U.S., the speed of reversion of the market log dividend-price ratio towards the fundamental equilibrium is a nonlinear, increasing function of the degree of mispricing, providing evidence supporting the risky arbitrage hypothesis. Further research might concentrate on particular sectors where the risks of arbitrage are greatest and its effect is therefore likely to be weakest. (JEL G12, G14).

Original language	English
Pages (from-to)	524-536
Number of pages	13
Journal	Economic Inquiry
Volume	39
Issue number	4
DOIs	https://doi.org/10.1093/ei/39.4.524
State	Published - Oct 2001

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abstract = "We provide a simple test of two alternative views of arbitrage activity: the risky arbitrage hypothesis and the limits of arbitrage hypothesis. For the U.S., the speed of reversion of the market log dividend-price ratio towards the fundamental equilibrium is a nonlinear, increasing function of the degree of mispricing, providing evidence supporting the risky arbitrage hypothesis. Further research might concentrate on particular sectors where the risks of arbitrage are greatest and its effect is therefore likely to be weakest. (JEL G12, G14).",

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AB - We provide a simple test of two alternative views of arbitrage activity: the risky arbitrage hypothesis and the limits of arbitrage hypothesis. For the U.S., the speed of reversion of the market log dividend-price ratio towards the fundamental equilibrium is a nonlinear, increasing function of the degree of mispricing, providing evidence supporting the risky arbitrage hypothesis. Further research might concentrate on particular sectors where the risks of arbitrage are greatest and its effect is therefore likely to be weakest. (JEL G12, G14).

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Risky arbitrage, limits of arbitrage, and nonlinear adjustment in the dividend-price ratio

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