Econometrica Vol. 72 No. 4 2004
Price Manipulation and Quasi-Arbitrage
Abstract
In an environment where trading volume affects security prices and where prices are uncertain when trades are submitted, quasi-arbitrage is the availability of a series of trades that generate infinite expected profits with an infinite Sharpe ratio. We show that when the price impact of trades is permanent and time-independent, only linear price-impact functions rule out quasi-arbitrage and thus support viable market prices. When trades have also a temporary price impact, only the permanent price impact must be linear while the temporary one can be of a more general form. We also extend the analysis to a time-dependent framework.
- DOI
- 10.1111/j.1468-0262.2004.00531.x
- Volume
- 72
- Issue
- 4
- Pages
- 1247-1275
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref