The Value of Arbitrage
This paper studies the social value of closing price differentials in financial markets. We show that arbitrage gaps (price differentials between markets) exactly correspond to the marginal social value of executing an arbitrage trade. We further show that arbitrage gaps and measures of price impact are sufficient to compute the total social value from closing an arbitrage gap. Theoretically, we show that, for a given arbitrage gap, the total social value of arbitrage is higher in more liquid markets. We apply our framework to compute the welfare gains from closing arbitrage gaps in the context of covered interest parity violations and several dual-listed companies. The estimates of the value of closing arbitrage gaps vary substantially across applications.
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Copy CitationEduardo Dávila, Daniel D. Graves, and Cecilia Parlatore, "The Value of Arbitrage," NBER Working Paper 29744 (2022), https://doi.org/10.3386/w29744.Download Citation
Published Versions
Eduardo Dávila & Daniel Graves & Cecilia Parlatore, 2024. "The Value of Arbitrage," Journal of Political Economy, vol 132(6), pages 1947-1993.
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