Working Paper: CEPR ID: DP15064
Authors: Marco Pagano; Sergey Kovbasyuk
Abstract: An arbitrageur with short investment horizon gains from accelerating price discovery by advertising his private information. However, advertising many assets may overload investors' attention, reducing the number of informed traders per asset and slowing price discovery. So the arbitrageur optimally concentrates advertising on just a few assets, unless his trades have significant price impact. The arbitrageur's gain from advertising is increasing in the assets' mispricing and in the precision of his private information, and is decreasing in its difficulty for investors. If several arbitrageurs have private information, inefficient equilibria can arise, where investors' attention is overloaded and substantial mispricing persists.
Keywords: Limits to Arbitrage; Advertising; Price Discovery; Limited Attention
JEL Codes: G11; G14; G20; D84
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Advertising by arbitrageurs (G19) | Increased attention from investors (G24) |
| Increased attention from investors (G24) | Accelerated price discovery (G13) |
| Advertising by arbitrageurs (G19) | Accelerated price discovery (G13) |
| Effectiveness of advertising (M37) | Mispricing of assets (G19) |
| Effectiveness of advertising (M37) | Precision of arbitrageur's private information (D89) |
| Multiple arbitrageurs (G19) | Overloading investor attention (G40) |
| Overloading investor attention (G40) | Persistent mispricing (G19) |
| Concentrated advertising (M37) | Effective advertising (M37) |