Work

Arbitrage With Holding Costs: A Utility-Based Approach

Year: 1992

Type: article

Abstract: ABSTRACT Unit time costs, or holding costs, are incurred in many arbitrage contexts. Examples include losing the use of short sale proceeds and lending funds at below market rates in reverse repurchase agreements. This paper analyzes the investment problem of a risk averse arbitrageur who faces holding costs. The model allows prices to deviate from “fundamental” values without allowing for riskless arbitrage opportunities. After characterizing an arbitrageur's optimal strategy, the model is examined in the context of the Treasury market. The analysis reveals that holding costs are an important friction in this market and that they can significantly affect arbitrageur behavior.

Source: The Journal of Finance

DOI: 10.1111/j.1540-6261.1992.tb04658.x

Authors: BRUCE TUCKMAN, JEAN‐LUC VILA

Institutions: Cornell University, New York University, Massachusetts Institute of Technology

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W1990800290

FWCI: 6.299

Cites: 17

Cited by: 107

Related to: 10