Limited arbitrage capital enables prices to remain mispriced indefinitely.

Evidence

Perhaps the most interesting single line of work in behavioral finance pioneered especially by Andrei Shleifer has been the modeling of situations of the kind referred to by my LTCM interviewees. These are situations in which the powers of arbitrage are limited, for example because arbitrageurs have access to only finite amounts of capital, and temporarily adverse price movements can generate margin calls and other demands on capital. — Donald MacKenzie, An Engine, Not a Camera, 1216

Categorization

• XREF: connects to: Limited arbitrage capital can force abandonment of even certain-profit trades — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1217; Long capital lockups exist because arbitrage spreads can widen before converging — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1041; Constrained arbitrage allows finance-theory models to diverge from actual prices. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1213 (+3 more)

Broader Connections

• Limited arbitrage capital can force abandonment of even certain-profit trades #expands (0.90) — Donald MacKenzie, An Engine, Not a Camera, 1217
• Constrained arbitrage allows finance-theory models to diverge from actual prices. #expands (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1213
• Convergence arbitrage guarantees profit if held to maturity #contradicts (0.80) — Donald MacKenzie, An Engine, Not a Camera, 983
• The 1987 crash exposed limits of arbitrage as a mechanism linking markets #exemplifies (0.80) — Donald MacKenzie, An Engine, Not a Camera, 822
• Long capital lockups exist because arbitrage spreads can widen before converging #expands (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1041
• Arbitrage enforces a real link that anchors derivatives to underlying assets #contradicts (0.75) — Donald MacKenzie, An Engine, Not a Camera, 781