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

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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
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School
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:	Date Event April 2017 Published 30 December 2016 Available 22 September 2016 Accepted
Date of first compliant deposit:	21 October 2016
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
Funder:	France. Agence nationale de la recherche (ANR)
Grant number:	ANR-11-IDEX-0003/Labex Ecodec/ANR-11-LABX-0047
Related URLs:	Open Access File

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