This paper shows how to decompose the dollar profit earned from an option into two basic components: ¶ mispricing of the option relative to the asset at the time of purchase, and · profit from subsequent fortuitous changes or mispricing of the underlying asset. This separation hinges on measuring the “true relative value” of the option from its realized payoff. The payoff from any one option ha...

We examine how short sale constraints on portfolio holdings affect closed-end fund (CEF) discounts and thereby provide evidence on the causal effect of limits to arbitrage on asset mispricing. Using Regulation SHO as a natural experiment that relaxes shortsale constraints on pilot stocks, we find that discounts of CEFs holding more pilot stocks decrease relative to CEFs holding fewer pilot stoc...

We analyze a simple model of an asset market, in which a large rational trader interacts with ‘‘noise speculators’’ who seek short-run speculative gains, and become active following a prolonged episode of mispricing relative to the asset’s fundamental value. Themodel gives rise to price patterns such as bubble dynamics, positive short-run correlation and vanishing long-run correlation of price ...

The predominant explanation for arbitrage crashes is a lack of investor capital to exploit mispricing. This paper shows that slow moving capital is only partially responsible for the 2005 and 2008 arbitrage crashes in the convertible bond market. Even when convertible bonds where underpriced, investors were still buying strictly dominated straight bonds from the same issuers. This finding sugge...

We propose a general equilibrium model for asset pricing that incorporates asymmetric information as the key element determining security prices. In our setting, the concepts of completeness, arbitrage, state price and equivalent martingale measure are extended to the case of asymmetric information. Our model shows that in a so-called quasi-complete market, agents with differential information ...

We propose to measure investor climate sentiment by performing analysis on StockTwits posts change and global warming. In financial markets, stocks of emission (carbon-intensive) firms underperform clean (low-emission) when is more positive. document investors overreaction risk reversal in longer horizons. Salient but uninformative events, such as the release a report abnormal weather facilitat...