TY  - JOUR
AU  - Gabaix,Xavier
AU  - Krishnamurthy,Arvind
AU  - Vigneron,Olivier
TI  - Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11851
PY  - 2005
Y2  - December 2005
UR  - http://www.nber.org/papers/w11851
L1  - http://www.nber.org/papers/w11851.pdf
N1  - Author contact info:
Xavier Gabaix
New York University
Finance Department
Stern School of Business
44 West 4th Street, 9th floor
New York, NY 10012
Tel: 212-998-0257
Fax: 212-995-4233
E-Mail: xgabaix@stern.nyu.edu

Arvind Krishnamurthy
Kellogg School of Management
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/491-2671
Fax: 847/491-5719
E-Mail: a-krishnamurthy@northwestern.edu

Olivier Vigneron
Director
Winchester House
1 Great Winchester Street
London EC2N 2DB
E-Mail: olivier.vigneron@db.com
AB  - "Limits of Arbitrage" theories hypothesize that the marginal investor in a particular asset market is a specialized arbitrageur rather than a diversified representative investor. We examine the mortgage-backed securities (MBS) market in this light. We show that the risk of homeowner prepayment, which is a wash in the aggregate, is priced in the MBS market. The covariance of prepayment risk with aggregate wealth implies the wrong sign to match the observed prices of prepayment risk. The price of risk is better explained by a kernel based on MBS-market-wide specific risk. This finding is consistent with the specialized arbitrageur hypothesis.
ER  -