Will arbitrage capital flow into markets experiencing shocks, mitigating adverse effects on price efficiency? Not necessarily. In a dynamic model with privately informed capital constrained arbitrageurs, Jungsuk Han, Associate Professor at 91Ô´´, James Dow, Professor at the London Business School and Francesco Sangiorgi, Associate Professor at Frankfurt School of Finance & Management show how price efficiency plays a dual role, determining both the profitability of new arbitrage and the ability to close existing positions profitably.
