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

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

Bruce I. Jacobs (Contact Author)

Jacobs Levy Equity Management ( email )

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P.O. Box 650
Florham Park, NJ 07932-0650
United States
973-410-9222 (Phone)
973-410-9333 (Fax)

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