Dynamic Strategic Arbitrage

Download or read book Dynamic Strategic Arbitrage written by Vincent Fardeau and published by . This book was released on 2016 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: Many arbitrage strategies are dominated by a few large arbitrageurs who recognize their price impact. I model arbitrageurs as imperfectly competitive intermediaries facilitating risk-sharing between two clienteles of competitive investors. I show that in the presence of market power, i) anticipated supply shocks generate time-series momentum and reversals around the realization of the shocks, ii) negative supply shocks can trigger counterintuitive changes in the sign of liquidity premia, and iii) more risk-averse arbitrageurs may provide more liquidity. Further, a higher trading frequency increases market depth.