Professor Rohit Rahi from London School of Economics is giving a VGSF research seminar on
"Arbitrage Networks" on January 18 (Friday, 15:30-17:00) at Institute for
Advanced Studies(HS II),Stumpergasse 56, 1060 Vienna. You can download the paper to be
presented at the VGSF webpage (Activities & Events--> Research Seminars). The
abstract of the paper is attached below.
Professor Rahi is going to visit Vienna from Jan 16 to 21. If you would like to meet him,
please let me know as soon as possible.
Kind regards,
Youchang Wu
This paper is studies the general equilibrium implications of arbitrage trades by
strategic players in segmented financial markets. Arbitrageurs exploit clientele
effects and choose to specialize in one category of trades, taking into consideration
all other arbitrage strategies. This results in an equilibrium network of arbitrageurs.
The optimal network for arbitrageurs is of the hub-spoke kind. The
equilibrium network, in contrast, is never optimal for arbitrageurs and is never
hub-spoke. The reason is that equilibrium networks suffer from a Prisoner’s
Dilemma problem that prevents network externalities from being internalized.
We show that, as the number of intermediaries grows, equilibrium allocations
converge to those of the frictionless complete-markets Arrow-Debreu economy.