Government Intervention and Arbitrage
2018
We model and document the novel notion that direct government intervention in a market may induce violations of the
lawof one
price(LOP) in other,
arbitrage-related markets. We show that the introduction of a government pursuing a non-public, partially informative price target in a model of strategic trading and segmented dealership generates equilibrium price differentials among fundamentally identical (or linearly related) assets -- especially when markets are illiquid, LOP violations are small, speculators are heterogeneously informed, or policy uncertainty is high. We find supportive evidence in a sample of ADRs traded in U.S. exchanges and
currency interventionsby developed and emerging countries between 1980 and 2009.
Keywords:
-
Correction
-
Source
-
Cite
-
Save
188
References
6
Citations
NaN
KQI