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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
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: |
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| 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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