A0167
Title: Limits to arbitrage to explain portfolio gains from asset mispricing
Authors: Nathan Lassance - UCLouvain (Belgium) [presenting]
Alberto Martin-Utrera - Iowa State University (United States)
Abstract: The efficiency gains from asset mispricing are studied through the lenses of an optimal arbitrage portfolio exploiting a large set of firm characteristics. In particular, the tangency portfolio is decomposed into a level component that captures time-series return variation and an optimal arbitrage component that exploits mispricing. It is found that the arbitrage portfolio offers considerable efficiency gains. However, these gains only survive arbitrage impediments such as estimation risk, transaction costs, and short-sale constraints during high-sentiment periods. This finding are capitalized on to construct arbitrage-friendly portfolios that effectively utilize asset mispricing to span better the achievable efficient frontier.
