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Foucault, Thierry, Kozhan, Roman and Tham, Wing Wah (2017) Toxic arbitrage. The Review of Financial Studies, 30 (4). pp. 1053-1094. doi:10.1093/rfs/hhw103 ISSN 0893-9454.
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Official URL: https://doi.org/10.1093/rfs/hhw103
Abstract
Short-lived arbitrage opportunities arise when prices adjust with a lag to new information. They are toxic because they expose dealers to the risk of trading at stale quotes. Hence, theory implies that more frequent toxic arbitrage opportunities and faster responses to these opportunities should impair liquidity. We provide supporting evidence using data on triangular arbitrage. As predicted, illiquidity is higher on days when the fraction of toxic arbitrage opportunities and arbitrageurs’ relative speed are higher. Overall, our findings suggest that the price efficiency gain of high-frequency arbitrage comes at the cost of increased adverse selection risk.
| Item Type: | Journal Article | ||||||||
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| Subjects: | H Social Sciences > HG Finance | ||||||||
| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| Library of Congress Subject Headings (LCSH): | Arbitrage -- Mathematical models, Finance | ||||||||
| Journal or Publication Title: | The Review of Financial Studies | ||||||||
| Publisher: | Oxford University Press | ||||||||
| ISSN: | 0893-9454 | ||||||||
| Official Date: | April 2017 | ||||||||
| Dates: |
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| Volume: | 30 | ||||||||
| Number: | 4 | ||||||||
| Page Range: | pp. 1053-1094 | ||||||||
| DOI: | 10.1093/rfs/hhw103 | ||||||||
| Status: | Peer Reviewed | ||||||||
| Publication Status: | Published | ||||||||
| Access rights to Published version: | Open Access (Creative Commons) | ||||||||
| Date of first compliant deposit: | 21 October 2016 | ||||||||
| Date of first compliant Open Access: | 30 December 2018 | ||||||||
| Funder: | France. Agence nationale de la recherche (ANR) | ||||||||
| Grant number: | ANR-11-IDEX-0003/Labex Ecodec/ANR-11-LABX-0047 | ||||||||
| Related URLs: |
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