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- Limits_to_arbitrage abstract "Limits to arbitrage is a theory that, due to restrictions that are placed on funds that would ordinarily be used by rational traders to arbitrage away pricing inefficiencies, prices may remain in a non-equilibrium state for protracted periods of time.The efficient market hypothesis assumes that whenever mispricing of a publicly traded stock occurs, an opportunity for low-risk profit is created for rational traders. The low-risk profit opportunity exists through the tool of arbitrage, which, briefly, is buying and selling differently priced items of the same value, and pocketing the difference. If a stock falls away from its equilibrium price (let us say it becomes undervalued) due to irrational trading (noise traders), rational investors will (in this case) take a long position while going short a proxy security, or another stock with similar characteristics. Rational traders usually work for professional money management firms, and invest other peoples' money. If they engage in arbitrage in reaction to a stock mispricing, and the mispricing persists for an extended period, clients of the money management firm can (and do) formulate the opinion that the firm is incompetent. This results in withdrawal of the clients' funds. In order to deliver funds, the manager must unwind the position at a loss. The threat of this action on behalf of clients causes professional managers to be less vigilant to take advantage of these opportunities. This has the tendency to exacerbate the problem of pricing inefficiency.Long-Term Capital Management became a victim of limits to arbitrage in 1998. It took bets on the convergence of the prices of certain bonds. These bond prices were guaranteed to converge in the long run. However, in the short run, because of the East Asian crisis and the Russian government's default on its debt, panicked investors traded against LTCM's position, driving prices that should have converged further apart. This caused LTCM to face margin calls. Because they did not have enough money to cover these calls, they were compelled to close out their positions at huge losses, even though, had they held on to their positions, they would have made significant profits.".
- Limits_to_arbitrage wikiPageID "2763633".
- Limits_to_arbitrage wikiPageLength "3314".
- Limits_to_arbitrage wikiPageOutDegree "17".
- Limits_to_arbitrage wikiPageRevisionID "598576588".
- Limits_to_arbitrage wikiPageWikiLink Arbitrage.
- Limits_to_arbitrage wikiPageWikiLink Category:Financial_markets.
- Limits_to_arbitrage wikiPageWikiLink Economic_equilibrium.
- Limits_to_arbitrage wikiPageWikiLink Efficient-market_hypothesis.
- Limits_to_arbitrage wikiPageWikiLink Efficient_market_hypothesis.
- Limits_to_arbitrage wikiPageWikiLink Equilibrium_price.
- Limits_to_arbitrage wikiPageWikiLink Investment.
- Limits_to_arbitrage wikiPageWikiLink Investment_management.
- Limits_to_arbitrage wikiPageWikiLink Long-Term_Capital_Management.
- Limits_to_arbitrage wikiPageWikiLink Long_(finance).
- Limits_to_arbitrage wikiPageWikiLink Margin_(finance).
- Limits_to_arbitrage wikiPageWikiLink Margin_calls.
- Limits_to_arbitrage wikiPageWikiLink Noise_trader.
- Limits_to_arbitrage wikiPageWikiLink Profit_(economics).
- Limits_to_arbitrage wikiPageWikiLink Proxy_security.
- Limits_to_arbitrage wikiPageWikiLink Short_(finance).
- Limits_to_arbitrage wikiPageWikiLink Stock.
- Limits_to_arbitrage wikiPageWikiLink Stock_trader.
- Limits_to_arbitrage wikiPageWikiLink Theory.
- Limits_to_arbitrage wikiPageWikiLinkText "Limits to arbitrage".
- Limits_to_arbitrage wikiPageWikiLinkText "limits to arbitrage".
- Limits_to_arbitrage hasPhotoCollection Limits_to_arbitrage.
- Limits_to_arbitrage wikiPageUsesTemplate Template:Nofootnotes.
- Limits_to_arbitrage subject Category:Financial_markets.
- Limits_to_arbitrage hypernym Theory.
- Limits_to_arbitrage type Article.
- Limits_to_arbitrage type Book.
- Limits_to_arbitrage type Article.
- Limits_to_arbitrage type Market.
- Limits_to_arbitrage comment "Limits to arbitrage is a theory that, due to restrictions that are placed on funds that would ordinarily be used by rational traders to arbitrage away pricing inefficiencies, prices may remain in a non-equilibrium state for protracted periods of time.The efficient market hypothesis assumes that whenever mispricing of a publicly traded stock occurs, an opportunity for low-risk profit is created for rational traders.".
- Limits_to_arbitrage label "Limits to arbitrage".
- Limits_to_arbitrage sameAs m.08192l.
- Limits_to_arbitrage sameAs Q17141886.
- Limits_to_arbitrage sameAs Q17141886.
- Limits_to_arbitrage wasDerivedFrom Limits_to_arbitrage?oldid=598576588.
- Limits_to_arbitrage isPrimaryTopicOf Limits_to_arbitrage.