Advertising Arbitrage

47 Pages Posted: 2 May 2014 Last revised: 4 Apr 2022

See all articles by Sergey Kovbasyuk

Sergey Kovbasyuk

New Economic School, Moscow

Marco Pagano

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

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Date Written: April 1, 2022

Abstract

An arbitrageur with short investment horizon gains from accelerating price discovery by advertising his private information. However, advertising many assets may overload investors' attention, reducing the number of informed traders per asset and slowing price discovery. So the arbitrageur optimally concentrates advertising on just a few assets, unless his trades have significant price impact. The arbitrageur's gain from advertising is increasing in the assets' mispricing and in the precision of his private information, and is decreasing in its complexity. If several arbitrageurs have private information, inefficient equilibria can arise, where substantial mispricing persists or investors' attention is overloaded.

Keywords: limits to arbitrage, advertising, price discovery, limited attention

JEL Classification: G11, G14, G2, D84

Suggested Citation

Kovbasyuk, Sergey and Pagano, Marco, Advertising Arbitrage (April 1, 2022). Available at SSRN: https://ssrn.com/abstract=2431270 or http://dx.doi.org/10.2139/ssrn.2431270

Sergey Kovbasyuk (Contact Author)

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Marco Pagano

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

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