An Anatomy of Arbitrageurs: Evidence from Open-End Structured Funds*

This paper exploits a unique account-level dataset of structured funds to study how arbitrageurs trade during bubble periods (i.e., when large positive swings of mispricing occur in structured funds). I find that arbitrageurs can both ride bubbles during the bubble-formation periods and make arbitrage trades during the bubble-bursting periods. In particular, arbitrageurs ride bubbles more aggressively when local unsophisticated investors start to trade in the direction of fueling bubbles and quit this strategy when mispricing becomes excessive. Identification tests based on the social contagion effect among unsophisticated investors support a causal interpretation. Moreover, arbitrageurs who can ride bubbles make more trading profits than those who only conduct arbitrage trades. These results suggest that arbitrageurs do not always trade in the direction of eliminating mispricing and that local information may play a pivotal role in shaping their trading motivations.