Gur Huberman

Price Manipulation and Quasi-Arbitrage

Coauthor(s): Werner Stanzl.

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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.

Copyright The Econometric Society 2004.

Source: Econometrica
Exact Citation:
Huberman, Gur, and Werner Stanzl. "Price Manipulation and Quasi-Arbitrage." Econometrica 74, no. 4 (July 2004): 1247-76.
Volume: 74
Number: 4
Pages: 1247-76
Date: 7 2004