A diversified portfolio of risk arbitrage positions produces an abnormal return of 0.6–0.9% per month over the period from 1981 to 1996. We trace these profits to practical limits on risk arbitrage. In our model of risk arbitrage, arbitrageurs’ risk-bearing capacity is constrained by deal completion risk and the size of the position they hold. Consistent with this model, we document that the returns to risk arbitrage increase in an ex ante measure of completion risk and target size. We also examine the influence of the general supply of arbitrage capital, measured by the total equity holdings of arbitrageurs, on arbitrage profits

We examine 82 situations where the market value of a company is less than its subsidiary. These situations imply arbitrage opportunities, providing an ideal setting to study the risks and market frictions that prevent arbitrageurs from immediately forcing prices to fundamental values. For 30 percent of the sample, the link between the parent and its subsidiary is severed before the relative value discrepancy is corrected. Furthermore, returns to a specialized arbitrageur would be 50 percent larger if the path to convergence was smooth rather than as observed. Uncertainty about the distribution of returns and characteristics of the risks limits arbitrage

This excellent book provides the reader with a broad introduction to, and a powerful advocacy of, behavioral finance. In the tradition of the best of the Clarendon Lecture Series, Andrei Shleifer provides a clear context and motivation for a collection of his influential ideas in this field, emphasizing central themes that link together the wide scope of this work. Topics include: investor sentiment, the limits of arbitrage, the closed-end fund puzzle, positive feedback investment, and both market overreaction and underreaction to news, as well as general discussions on the motivation for this research and promising future directions

To short a stock, an arbitrageur must first borrow it. This paper describes the market for borrowing and lending U.S. equities, emphasizing the conditions generating and sustaining short-sale constraints. A large institutional lending intermediary provided eighteen months (4/2000–9/2001) of data on loan supply (“shortability”), loan fees (“specialness”), and loan recalls. The data suggest that while loan market specials and recalls are rare on average, the incidence of these short-sale constraints is increasing in the divergence of opinion among investors. Beyond some threshold, investor optimism itself can limit arbitrage via the loan market mechanism