Chapter 4: Professional Arbitrage

from the book

Shleifer: “Are markets efficient?”

Introduction

4.0. Basics

4.1. An agency model of limited arbitrage

4.2. Performance-based arbitrage and market efficiency

4.3. Discussion of performance – based arbitrage

4.4. Long Term Capital Management

Seminararbeit von:
Eigner Franz, a0301345, A140
bei Prof. Dorosel, UK Financial Markets, WS 05/06
Wien, Jänner 2006
UK Financial Markets Chapter 4: Professional Arbitrage Eigner Franz, WS 05/06

Introduction:

Shleifer’s book „Inefficient Markets. An Introduction to Behavioural Finance?“ deals with the
problematic nature of the efficient markets theory. EMH, a main component of efficient
markets theory which was very popular in the 70’s, asserts that financial markets are efficient
and that prices on traded assets fully reflect the available information and therefore collective
beliefs of all investors about future prospects. It states that securities prices in financial
markets must equal fundamental values, either because all investors are rational or because
arbitrage eliminates pricing anomalies As a consequence, it is not possible to consistently
outperform the market by using public (known) information. This doesn’t require that all
investors behave rationally, but investors’ trades have to be random enough and not
predictable. If some behave irrationally, rational arbitrageurs will eliminate their influence on
prices. However in the 80’s and the 90’s, the EMH was challenged, on both the theoretical
and the empirical grounds. A new alternative theory was invented, behaviour finance, which
primarily says that “economic theory does not lead us to expect markets to be efficient.
Behavioural finance states, in contrast to the efficient markets theory, that “real world
arbitrage is risky and therefore limited1”. In this paper, chapter 4 of this book ‘Professional
Arbitrage’ will be treated in detail, which mainly shows by a model, based on agency
relationship, that arbitrages are limited and unstable and hence lead to inefficient markets.

4.0 Basics

The fundamental new feature in this chapter is agency relationship, which separates
knowledge and resources. In our new, more common model in reality, investors are
responsible for the resources and the arbitrageurs are in possession of specialized knowledge
in order to manage these resources. Before we dealt with arbitrageurs who used their own
wealth to trade and their investments were not limited by resources but only by risk aversion.
Now we deal with arbitrageurs, who manage the money they get from investors. Let us think
for instance of hedge funds, which take money from wealthy individuals, banks and other
investors and invest it profitably.

1
Limits to arbitrage is a theory which assumes that restrictions placed upon funds, that would ordinarily be
used by rational traders to arbitrage away pricing inefficiencies, leave prices in a non-equilibrium state for
protracted periods of time.

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A main point of this chapter is “Performance based arbitrage”, which is the “phenomenon of
responsiveness of funds under management2 to past returns.” Arbitrage requires capital,
which is invested by arbitrageurs. Investors have limited knowledge about the market. Hence,
when they have to allocate funds to the arbitrageurs, they can mainly focus their attention on
the past performance of their funds. If the prices for their funds are decreasing, they could
believe their arbitrageur is incompetent. As a result they may refuse giving him more money
or even withdraw some of the capital, giving it to other arbitrageurs in the same market.
The paradox in this situation is that when prices are falling, for instance when mispricing
widens, arbitrageurs have the best opportunities in making money. (because prices have to
increase to the fundamental value in the long term)
However, in fear, investors could lose their faith in them arbitrageurs will be less aggressive
in betting against mispricing.
It can be shown, that “this feature of arbitrage can limit its effectiveness in achieving market
efficiency, especially when prices are far away from fundamentals and investors are fully
invested.”

4.1 An Agency Model of Limited Arbitrage

Let us set up a simple model that shows us the mechanics of performance based arbitrage and
the agency relationship between arbitrageurs and their investors. In our market for a specific
asset, we have three types of participants. Noise traders3, arbitrageurs and investors in
arbitrage funds. Investors allocate funds between arbitrageurs, who are trading only in one
market whereas investors are active in other markets too. We have three time periods 1 , 2 and
3. The fundamental value of the asset is V, which is at first, only known to arbitrageurs and
not to investors. Finally at t3 the value of the asset is equal to the price of the asset which is
known by arbitrageurs and noise traders (V = p3). Hence there is no long run fundamental risk
in such a trade.
Noise traders are assumed to be pessimistic. In each period they may experience a pessimism
shock S.

2
Compare: Assets under management (AUM) is a term used by financial services companies in the mutual fund and money
management or investment management business to determine how much money they are managing. Many financial services
companies use this as a measure of success and comparison against their competitors.

3
A noise trader is a stock trader that does not have any specific information of the security. If the efficient market
hypothesis holds, noise traders add liquidity to a market while not distorting valuations. In fact, a market without noise
traders will tend to break down, because prices in such a market will become fully revealing.

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The Aggregate noise traders’ demand for the asset is:

QN(t) = [V- St] / pt (4.1)
S1 is known to arbitrageurs, S2 is unknown; arbitrageurs and investors are fully rational;
If S2 > S1, noise trade misperceptions deepen before they correct at t = 3. We assume risk-
neutral arbitrageurs who take position against mispricing generated by noise traders.
Arbitrageurs have cumulative, but limited resources under management (which includes also
their borrowing capacity) given by F. F1 is exogenously given; F2 will be described later (As
opposed to the model from chapter 2, where arbitrageurs could invest as much as they
wanted).
If prices at time 2 recover to V, then arbitrageurs invest in cash. If not, arbitrageurs will invest
all of F2 in the underpriced asset, because it’s known that p rises to V at t = 3 for sure. In this
case, the arbitrageurs’ demand for the asset is: QA(2) = F2/p2
QN(2) + QA(2) = (V – S2 + F2) / p2
Since aggregate demand for the asset equals the unit supply, we get:
p2 = V - S2 + F2 (4.2)
assumptions:
F2 < S2, which means that “arbitrage resources are not sufficient to bring the period 2 price to
fundamental value, unless of course, noise traders misperceptions have corrected anyway.”,
and also F1 < S1.
In t1, arbitrageurs also want to keep some of the money in cash in case the asset becomes even
more underpriced at t = 2, in order to invest more in that asset.
It concludes: QA(1) = D1/p1
where D1 is the amount that arbitrageurs invests in the asset at t = 1
and p1 = V – S1 + D1 (4.3)

We now specify the relationship between arbitrageurs and their investors, which determines
F2. We are looking at a particular market segment and within such segments are many
arbitrageurs competing against each other. We assume that no arbitrageur can affect asset
prices, they all have the same marginal cost and each arbitrageur has at least on competitor,
who is a perfect substitute. Under these conditions, we can say: price = MC
Risk neutral investors allocate their $1 investment to maximize expected consumer surplus.
(expected return on dollar – price charged by the arbitrageur) Investors have prior beliefs
about the expected return of each arbitrageur and give his money to the arbitrageur with the
highest expected return. Investors have different beliefs, hence there is no arbitrageur who

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gets all the money. The market share of each arbitrageur is just the total fraction of investors,
who believes he is the best.
Investors update their beliefs about the future expected returns by looking at the past
performance because they neither know all the trading strategies of the arbitrageurs nor they
have specialized knowledge. Hence arbitrageurs who experience poor return in a given period
should lose market share to those with better returns.
We can now set up investors’ aggregate supply of funds to the arbitrageur at time 2. It’s an
increasing function of arbitrageurs’ gross return between time 1 and time 2, which bases on
Performance-based-arbitrage (PBA).
F2 = F1 * G[D1/F1) * (p2/p1) + (F1 - D1)/F1] (4.4)
where return on the asset = p2/p1 and with G(1) = 1, G´ ≥ 1, G´´≤ 0.
If arbitrageurs do an average job, they will neither gain nor lose funds under management. If
they outperform (underperform) the benchmark, they will gain (lose) funds. Investors try to
attribute an arbitrageurs performance to one of three causes: a random error, a deepening of
noise trader sentiment (bad luck) or (3) inferior ability.
Remark:
o “High variation in ability across arbitrageurs will tend to increase the responsiveness
of funds under management to past performance (G´).”
o “A high variance of the noise trader sentiment relative to the variation in ability will
generally decrease the responsiveness to past performance.”
Paradox: “Taking money away from an arbitrageur after noise trader sentiment deepens, i.e.
precisely when his expected return is the highest, is a rational response to the problem of
trying to infer the arbitrageur’s (unobserved) ability and future opportunities jointly from past
returns”.
We assume a linear G: G(x) = ax + 1 - a with a ≥ 1 (4.5)
where x is the arbitrageur’s gross return.
Funds under management for period 2 are:
F2 = a {D1(p2/p1) + (F1 – D1)} + (1-a) F1 = F1 – a D1 (1 - p2/p1) (4.6)
Remark:
o If p2 = p1, the arbitrageur earns a zero net return (he neither gains funds nor loses
funds under management.
o If p2 > p1, he gains funds, if p2 < p1, he loses funds.
o a: A higher a leads to more sensitive resources under management to past
performance. If a = 1, the arbitrageur doesn’t get any more money when he loses

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some money(but old funds are not withdrawn). If a > 1, funds are even withdrawn in
case of poor performance.

Problem of PBA:
”In conventional arbitrage, capital is allocated by arbitrageurs based on expected returns from
their trades.” But here, “under PBA, in contrast, capital is allocated based on past returns”,
which are low when expected returns are high. In this paradox situation, “arbitrageurs have to
face fund withdrawals and are not very effective in betting against the mispricing.” Hence
PBA is critical to our model. To avoid this problem, arbitrageurs could signal their abilities to
the investors by offering incentive contracts, where they insure investors against losses.
However these contracts in fact don’t eliminate the influence of past performance on the
market shares of arbitrageurs.”

Finally we have to set up the arbitrageur’s optimization problem.

We assume that the arbitrageur maximizes expected time 3 profits and under our assumptions
(all arbitrageurs are price takers and MC is constant) this is equivalent to maximizing
expected time 3 funds under management (the more funds, the more profit).
“We examine a specific form of uncertainty about S2. We assume that, with probability q
noise trader misperceptions deepen, so S2 = S > S1. With a complementary probability 1-q
noise traders recognize the true value of the asset at t = 2, so S2 = 0 and p2 = V.”
When S2 = 0, arbitrageurs liquidate their position at a gain at t = 2 and hold cash until t = 3
(because they can not earn money with the fund, V = p2 = p3)
Wd = a(D1*V/p1+ F1 – D1) + (1-a) * F1
When S2 = S, arbitrageur’s third period funds are given by
Wr = (V/p2) * [a {D1* p2/p1+ F1 – D1} + (1-a) * F1]
Arbitrageurs then maximize:
EW = (1-q) * Wd + q* Wr (4.7)

4.2 Performance-Based Arbitrage and Market Efficiency

3 benchmarks:
o In efficient markets, arbitrageurs can invest as much money as they want only limited
by their risk aversion, i.e. there is no capital limit. In this case, noise trader shocks can
be completely counteracted by arbitrageurs.

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o “Arbitrage resources are limited but PBA is inoperative, so arbitrageur can always
raise F1.” Even if they lose money, they can replenish their capital up to F1, (p1 = V -
S1 + F1 and p2 = V - S + F2). We see: prices fall exactly one by one with noise trader
shocks (p2 = V – S1 + F1 and P2 = V – S + F2).
o If a = 1, “arbitrageurs can not replenish the funds they have lost, but don’t
suffer from withdrawals beyond what they have lost.”

FOC to the arbitrageur’s optimization problem:

(1-q) * (V/p1 - 1) + q*(p2/p1 - 1) * V/p2 ≥ 0 (4.8)
The first term of (4.8) describes the “incremental benefit to arbitrageurs of an extra dollar of
investment if the market recovers at t = 2”, which means that noise trader recognize the true
value of the asset.
The second term describes the “incremental loss if the price falls at t = 2, before recovering at
t = 3, and so they have forgone the option of being able to invest more in that case.” (when p2
is small, arbitrageurs should invest, because p2 has to increase to V at sure the next period).

(4.8) holds with

o strict equality, if “arbitrageurs choose to hold back some funds for the option to invest
more at time 2”, in case the price deterioration is high and sure enough (D1 < F1).
o Strict inequality, if the first shock S1 is large and S is not too large relative to S1. For
this, q should be relative low, p1 low relative to V and p2 is not too low relative to p1,
i.e. prices should be expected to recover soon (D1 = F1). Under these circumstances,
arbitrageurs choose to be fully invested at t = 1 rather than hold spare reserves for the
next period. We call such situations, where mispricing is that high at t = 1 that
arbitrageurs want to be fully invested ‘extreme circumstances’.
I will describe the case with ‘extreme circumstances’ at some length.

Proposition 1:
For given V, S1, S, F1, a, there is a q* such that, for q > q*, D1 < F1, and for q < q*,
D1 = F1.
If (4.8) holds with equality, we can calculate equilibrium with (4.2) (4.3) (4.6) (4.8)
If (4.8) holds with inequality, we can calculate equilibrium with (4.2), (4.6) and with the
formulas D1 = F1, p1 = V – S1 + F1
Let V = 1, F1 = 0.2, a = 1.2, S1 = 0.3, S2 = 0.4

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We assume: q* = 0.35
o If q < 0.35, arbitrageurs are fully invested and D1 = F1 = 0.2, so p1 = 0.9
If noise trader sentiment deepens, we have F2 = 0.1639 and p2 = 0.7636
If noise trader sentiment recovers, we have F2 = 0.227 and p2 = V = 1
o If q > 0.35, arbitrageurs hold back some of the funds at time 1. Then p1 is lower than it
could be with full investment. We assume: q = 0.5; D1 = 0.1743 and p1 = 0.8743.
If noise trader sentiment deepens, then F2 = 0.1766 and p2 = 0.7766
If noise trader sentiment recovers, then F2 = 0.23 and V=1
This simple model shows us, that both equilibriums are plausible and that “the larger the
shocks are the further are the prices away from fundamental values.”

Proposition 2:
At the corner solution (D1 = F1), dp1/dS1 < 0, dp2/dS < 0 and dp1/dS = 0. At the
interior solution, dp1/dS1 < 0, dp2/dS < 0 and dp1/dS < 0
It says that “arbitrageurs’ ability to bear against mispricing is limited and larger noise trader
shocks lead to less efficient pricing.” When we have an interior solution, arbitrageurs are
holding more cash at t = 1 in order to spread the effect of a deeper period 2 and thus allowing
prices to fall more at t = 1. At t = 2, they have more funds in order to counter mispricing at
that period. “Here the reason for holding back is not risk aversion but rather the option to
invest more in the future if mispricing deepens.”

Proposition 3:
If arbitrageurs are fully invested at t = 1, and noise trader misperceptions deepen at t
= 2, then for a > 1 we have F2 < D1 and F2/p2 < D1/p1,
where F2 < D1 means arbitrageurs invest less total dollars in the asset at t = 2 than at t = 1 and
where F2/p2 < D1/p1 means that arbitrageurs actually hold less of the asset at t = 2 than at t = 1.
These are measurements for aggressiveness of arbitrageurs when mispricing worsens. “The
clearest case of less aggressive arbitrage at t = 2 would occur if arbitrageurs hold fewer shares
at t = 2, and are liquidating their holdings”, although prices have fallen from t = 1. This
proposition describes the extreme circumstances in our model, in which “fully invested
arbitrageurs experience an adverse price shock, face equity withdrawals and so liquidate their
holdings of the extremely underpriced asset. Arbitrageurs bail out of the market when
opportunities are the best”, i.e. when expected returns are high.

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For fully invested arbitrageurs, we get:

p2 = [V – S – aF1 + F1] / [1 – aF1/p1], (4.9)
where aF1 < p1, which is a simple stability condition that says “arbitrageurs don’t lose so much
money that they bail out of the market completely.” (Otherwise: p2 = V – S, at t = 2)
“In the stable equilibrium, arbitrageurs lose funds under management as prices fall and hence
liquidate some holdings, but they still stay in the market. “

Proposition 4:
At fully invested equilibrium, dp2/dS < -1 and d2p2 / (dS)2 not< 0
“This proposition shows that when arbitrageurs are fully invested at time 1, prices fall more
than one for one with the noise trader shock at time 2.” “When prices are furthest from
fundamental values, arbitrageurs take the smallest positions.”
If PBA intensifies i.e. as a rises, “the price decline per unit increase in S gets greater”. A
market driven by PBA loses its resiliency4 in extreme circumstances,
It is shown that “arbitrage process can be quite ineffective in bringing prices back to
fundament values in extreme circumstances. “
In the model in chapter 2 arbitrageurs are more aggressive when prices are furthest away from
fundamental values. Hence the stabilizing effect will be larger in these cases. This is constant
with Friedman, who stated that on average arbitrageurs make money and move prices toward
fundamentals. However our new model shows “that the times when arbitrageurs lose money
are precisely the times when prices are far away from fundamentals”, and in those times the
trading by arbitrageurs has the weakest stabilizing effect.

Which markets do arbitrageurs prefer?

It depends mainly on their “ability to ascertain value with confidence and to realize it
quickly.” Arbitrageurs prefer markets like bond market and foreign exchange market, where
calculations of relative values are manageable. Here the risk of involuntary liquidations is
low; hence the fundamental risk in arbitrage is little. Also markets with extreme leverage5,
short selling, and performance based fees are common, whereas in stock markets, both “the

4
dp2/dS measure of the resiliency of the market equal to zero for an efficient market and to -1 when a = 0 and
there is no PBA).
5
Financial leverage takes the form of borrowing money and reinvesting it with the hope to earn a greater rate of
return than the cost of interest. Leverage allows greater potential return to the investor than otherwise would
have been available. The potential for loss is greater because if the investment becomes worthless, not only is
that money lost, but the loan still needs to be repaid.

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absolute and relative values of different securities are harder to calculate.” Arbitrage
opportunities are harder both to identify.
In addition, specialized arbitrageurs “might avoid extremely volatile markets”, in contrast to
the well - diversified arbitrageurs of Chapter 2. The probabilities of shocks are in these
markets much higher and this deters off the arbitrageurs, although such markets sometimes
offer better arbitrage opportunities. Specialized arbitrageurs can not diversify that much
because of their limited knowledge.

4.3 Discussion of Performance – Based Arbitrage

“PBA delinks the arbitrageurs’ demand for an asset from its expected return and is
consequently very limited.” In fact, PBA plays an important role in the world. Arbitrageurs
might be able to “hold out and not liquidate until the price recovers. “By diversification
arbitrageurs might be able to avoid losing all the money at the same time, but diversification
is restricted on account of their specialized knowledge. Experienced arbitrageurs with “long
and successful track records may be in a better position than inexperienced arbitrageurs in
order to avoid equity withdrawals. When funds under management decline, they do it with a
lag. However lags on fund withdrawals are in reality very short. For instance voluntary
liquidation shortens the lags. When risk averse arbitrageurs liquidate, because of the fear that
a possible further adverse price move can cause a dramatic outflow of funds later on, or a
forced liquidation by creditors.” As a result, the fear of future withdrawals worsens the
situation and has a similar effect as withdrawals themselves.”
“Perhaps the most important reason why poor performance leads to quick asset sales is
liquidation by creditors”, so called involuntary liquidation. “Creditors usually demand
immediate repayment or else liquidate the collateral6, when the value of this collateral gets
near the debt level.” “Unlike the equity investors7 in funds, who may […] wait to withdraw
their capital, creditors have every incentive to rush to get their money back ahead of the
equity.” “Arbitrageurs need to come up with cash to satisfy their creditors and avoid
liquidation precisely when they are fully invested and do not have any spare cash. If the
arbitrageur cannot come up with the cash, the securities in the fund are liquidated, often in fire

6
Collateral is a word used for assets that secure a debt obligation. For example, in the case of a mortgage the
house serves as the collateral for the mortgage loan. This way, the bank is secured against the default risk of the
borrower not being able to meet the interest payments. In case of default the bank can sell the house and get its
money (or at least a part of it) back.
7
Equity investment generally refers to the buying and holding of shares of stock on a stock market by
individuals and funds in anticipation of income from dividends and capital gain as the value of the stock rises

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sales that fetch extremely low prices, with the result that the markets become still less
efficient, and the position of an arbitrageur still more precarious.”
A serious problem with involuntary liquidation by creditors is front running8. “If the bank in
question knows […] that the fund might liquidate holdings involuntarily, it has an incentive to
sell short9 the securities owned by the fund and to buy them back at lower prices, when the
fund is actually liquidating, possibly from the fund itself. The result of such short-selling is to
put downward pressure on prices and to accelerate liquidation.“
Finally, our model assumes that “all arbitrageurs have the same sensitivity of funds under
management to performance, and that all invest in the mispriced asset from the beginning.” In
fact, arbitrageurs differ. Some may have access to resources independent of past performance,
and might be able to invest more when prices are moving downwards. Hence these richer
arbitrageurs can partly undo the effects of PBA. However at some point they also make debts
to bet against the mispricing, as the mispricing gets deeper and feared future withdrawals
cause them to liquidate. In the extreme circumstances, they also are unlikely to stabilize the
market. At the end, “most arbitrageurs operating in a market are likely to find themselves
fully committed.”

Summary:
In our model, “PBA leads to potential instability of financial markets, particularly in extreme
circumstances.” This instability results from arbitrageurs and their creditors, who liquidate
when they are in money-losing positions, even when these positions have positive risk-
adjusted expected returns. “This instability manifests itself in substantial deviations of
security prices from fundamental values in time of crises, but also in large losses of the
arbitrageurs, their counterparties, and other financial market participants.” “Although lags in
liquidations, diversification and the presence of arbitrageurs whose resources are not
responsive to past performance ameliorate this problem, they are unlike to do so completely,
especially in a crisis.”

4.4 Long Term Capital Management

8
Front running is the illegal practice of a stock broker trading a security based on inside information before his
or her clients have been given the information.
9
Short selling is selling something short that one does not (yet) own. Most investors "go long" on an
investment, hoping that price will rise. Short sellers borrow a security and sell it hoping that it will decrease in
value so that they can buy it back at a lower price and keep the difference.

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One empirical example for inefficient market and limited arbitrage was the fall of LTCM. In
1998 “Russia defaulted on most of its ruble-denominated debt [government bonds] and
sharply devalued the ruble.” Furthermore it “imposed a moratorium that froze Western
investors’ accounts in which these ruble-denominated bonds were held, as well as disabled
Russian banks from paying off their private debts to Western creditors.” However Russia did
not, default on its foreign debt. The consequences of these actions were manifold.
A large fraction of Russia’s ruble-denominated debt at this time was held by Western hedge
funds. Many of the Western hedge funds expected Russian’s default on domestic (ruble-
denominated) debt. They hedged their risks by “selling short Russia’s foreign debt (on the
theory that Russia is unlikely to default on domestic market without defaulting on foreign
market) as well as selling the rubles forward to Russian banks”, because theory says that if
Russia devalues, they can at least benefit from their short position in the ruble. However as
we mentioned before, Russia did no default on its foreign debt and imposed a moratorium on
payments by its banks. As a consequence, neither of these hedges worked. Most hedge funds
investing in Russia suffered severe losses. Moreover some hedge funds used non-Russian
securities as collateral. After the default, these funds had to pay off their debt or else to face
liquidation of collateral. Hence many of them started liquidating other emerging markets
positions. In addition, bad news from Russia reduced the valuation of emerging markets
securities, which were liquidated in fire sales. Moreover, these liquidations spread to other
markets and became to a serious problem for the economy. In general only “the funds
survived which were more diversified, less leveraged, and better positioned vis-à-vis the
creditors.”
The best known hedge fund, which suffered from large liquidations, was Long Term Capital
Management (LTCM)10, a very large, leveraged fund. The basic idea behind investments of
LTCM was that over time the value of long-dated bonds would tend to become identical.
However the rate at which these bonds approached this price would be different, and that
more heavily traded bonds would approach long term price more quickly than less heavily
traded and less liquid bonds. After this fund lost half of its equity, many creditors (who
demanded cash or addition collateral) liquidated its portfolio at fire sales prices. Though
creditors only “reduced the value of their collateral and thus suffering huge losses on their
loans to LTCM.” “Hence the central problem was the uncoordinated efforts by separate
creditors to liquidate their collateral”, which resulted in large losses to all of them. These “fire

10
http://en.wikipedia.org
Long-Term Capital Management, last access: 3.01.2005

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sales seriously distorted the market and elevated uncertainty enough “to damage economy
seriously. The fear of a chain reaction existed, i.e. companies liquidate their securities to
cover their debts, and leading to a drop in prices which would force more companies to
liquidate their own debt, creating a vicious circle. LTCM was finally rescued by a small group
of investors, who “took 90 percent of the equity” and “wiped out the existing shareholders
other than LTCM’s partners.”
The fall of LTCM is an important example of the principle that arbitrage is not risk less. This
undermines the claim of efficient market theorists that markets must converge instantaneously
to efficient prices because of the action of rational investors.
Ironically, they were right long-term, the value of the government bonds did eventually
converge and the folded portfolio became very profitable. “However the long-term does not
matter if you cannot survive the short-term; this they failed to do.”11

Sources:

Jonathon E. Ingersoll: Theory of Financial Decisions Making. - New Jersey: Rowman & Littlefield Publishers,
1987.
Andrei Shleifer: Inefficient Markets. An Introduction to Behavioural Finance. - Oxford, New York: Oxford
University Press Inc., 2000.

http://en.wikipedia.org
Definitions for limits to arbitrage, assets under management, noise trader, leverage, equity investment, short
selling, collateral, front running
Last access: 03.01.2006

11
See above

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