Desmarais Global Finance Research Centre
DESMARAIS GLOBAL FINANCE RESEARCH CENTRE
presents
Denis Gromb
INSEAD and CEPR
Financially Constrained Arbitrage and Cross-Market Contagion
Friday, October 16, 2009
10:00 AM 鈥� 11:30 AM
Bronfman Bldg., Rm. 002
All are cordially invited to attend.
Abstract: We propose a continuous time infinite horizon equilibrium model of financial markets in which arbitrageurs have multiple valuable investment opportunities but face financial constraints. The investment opportunities, heterogeneous along different dimensions, are provided by pairs of similar assets trading at different prices in segmented markets. By exploiting these opportunities, arbitrageurs alleviate the segmentation of markets, providing liquidity to other investors by intermediating their trades. We characterize the arbitrageurs鈥� optimal investment policy, and derive implications for market liquidity and asset prices.