Government Intervention and Arbitrage

@inproceedings{Pasquariello2018GovernmentIA,
  title={Government Intervention and Arbitrage},
  author={Paolo Pasquariello},
  year={2018}
}
We model and document the novel notion that direct government intervention in a market – e.g., central bank trading in exchange rates – may induce violations of the law of one price (LOP) in other, arbitrage-related markets – e.g., the market for American Depositary Receipts (ADRs, dollar-denominated securities fully convertible in a preset amount of foreign shares). We show that the introduction of a stylized government pursuing a non-public, partially informative price target in a model of… CONTINUE READING

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