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Arbitrageur Heterogeneity, Investor Horizon and Arbitrage Opportunities: An Empirical Investigation
Author(s) -
Blenman Lloyd P.,
Thatcher Janet S.
Publication year - 1997
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1997.tb00423.x
Subject(s) - arbitrage , maturity (psychological) , financial economics , economics , asset (computer security) , investment (military) , fixed income arbitrage , monetary economics , transaction cost , business , spot contract , risk arbitrage , horizon , investment strategy , microeconomics , arbitrage pricing theory , capital asset pricing model , market liquidity , psychology , developmental psychology , computer security , politics , computer science , political science , law , futures contract , physics , astronomy
Evidence is provided that arbitrage profits in integrated currency and credit markets differ according to the initial asset allocation, trading horizon and investment objectives of arbitrageurs. It is shown that several types of profitable one‐way strategies can coexist and profits are differently distributed across maturity horizons. Moreover, there are episodes in the markets where particular strategies are consistently profitable. Strategies using the spot market and two credit transactions to create a synthetic forward contract are most likely to result in profitable arbitrage opportunities. This is directly attributable to the higher level of transactions costs in the forward markets.