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Execution risk in high-frequency arbitrage

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Kozhan, Roman and Tham, W. W. (2012) Execution risk in high-frequency arbitrage. Management Science, Volume 58 (Number 11). pp. 2131-2149. doi:10.1287/mnsc.1120.1541

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Official URL: http://dx.doi.org/10.1287/mnsc.1120.1541

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Abstract

In this paper, we investigate the role of execution risk in high-frequency trading through arbitrage strategies. We show that if rational agents face uncertainty about completing their arbitrage portfolios, then arbitrage is limited even in markets with perfect substitutes and convertibility. Using a simple model, we demonstrate that this risk arises from the crowding effect of competing arbitrageurs entering the same trade and inflicting negative externalities on each other. Our empirical results provide evidence that support the relevance of execution risk in high-frequency arbitrage.

Item Type: Journal Article
Divisions: Faculty of Social Sciences > Warwick Business School
Journal or Publication Title: Management Science
Publisher: Institute for Operations Research and the Management Sciences (I N F O R M S)
ISSN: 0025-1909
Official Date: November 2012
Dates:
DateEvent
November 2012Published
Volume: Volume 58
Number: Number 11
Page Range: pp. 2131-2149
DOI: 10.1287/mnsc.1120.1541
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access

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