When Seemingly Infallible Arbitrage Strategies Fail
Posted: 24 Oct 2016
Date Written: October 20, 1998
Abstract
Seemingly infallible arbitrage strategies can fail. When they do, they can take the markets down with them. The near collapse of Long-Term Capital Management parallels the experience of portfolio insurance in 1987.
Keywords: market crises, financial markets, arbitrage, hedge funds, Long-Term Capital Management, LTCM, leverage, portfolio insurance, Black-Scholes-Merton option pricing theory, systemic risk, market instability, 1987 market crash, illusion of liquidity, derivatives, dynamic hedging, option replication
JEL Classification: G10, G13
Suggested Citation: Suggested Citation
Jacobs, Bruce I., When Seemingly Infallible Arbitrage Strategies Fail (October 20, 1998). The Journal of Investing, Vol. 8, No. 1, pp. 9-10, Spring 1999, Available at SSRN: https://ssrn.com/abstract=2447036
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