Arbitrage With Holding Costs: A Utility-Based Approach

摘要: Unit time costs, or holding are incurred in many arbitrage contexts. Examples include losing the use of short sale proceeds and lending funds at below market rates reverse repurchase agreements. This paper analyzes investment problem a risk averse arbitrageur who faces costs. The model allows prices to deviate from "fundamental" values without allowing for riskless opportunities. After characterizing an arbitrageur's optimal strategy, is examined context Treasury market. analysis reveals that costs important friction this they can significantly affect behavior. FINANCIAL ECONOMISTS HAVE MADE great notion frictionless markets. Researchers define as set transactions which nothing yet risklessly provides positive cash flows. They then assume opportunities never exist derive precise implications about relative traded securities. presence frictions complicates story. In simplest models, trading make it impossible exploit small price deviations arbitrage-free relationships. Therefore, when do not admit opportunities, arbitrageurs nothing. When such bet all have. on sure proposition will be back line maturity date underlying While simple explain empirical regularity "fundamental value,"11 more careful portrayals richer models activity. Brennan Schwartz (1990), example, show position limits stock index futures valuable close before maturity. As result, may worthwhile open even