Econometrica

Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Jul, 2004, Volume 72, Issue 4

Price Manipulation and Quasi‐Arbitrage

https://doi.org/10.1111/j.1468-0262.2004.00531.x
p. 1247-1275

Gur Huberman, Werner Stanzl

In an environment where trading volume affects security prices and where prices are uncertain when trades are submitted, quasi‐arbitrage is the availability of a series of trades that generate infinite expected profits with an infinite Sharpe ratio. We show that when the price impact of trades is permanent and time‐independent, only linear price‐impact functions rule out quasi‐arbitrage and thus support viable market prices. When trades have also a temporary price impact, only the permanent price impact must be linear while the temporary one can be of a more general form. We also extend the analysis to a time‐dependent framework.


Log In To View Full Content

Journal News

View