Summary of article The limit of arbitrage In standard finance arbitrage is defined as simultaneous investment in two different markets for

the purpose of earning profit from the difference of prices in two markets without involving ones own capital. In simple words an arbitrageur gets his profit by buying cheaper security and then sells it at higher price. In standard finance it is assumed that arbitrage is capital free means arbitrage requires no capital, involve no risk and can expect hundred percent certain profit. In standard finance the mechanism of arbitrage is considered as one of the important concepts that help in the analysis of security market because it keeps market efficient and bring the prices to its fundamental value. This study throws light on realistic view of arbitrage trade and this is important because how arbitrageur manages other peoples money in the market. This study reveals that realistic arbitrages are more complex than the textbook description. This study nullify the assumptions of arbitrage in standard finance and claim that in real market scenario arbitrage is not capital free, not risk free, and probability of return on investment is not certain. In order to trade in exchange arbitrager needs to maintain the marginal account with his/her broker, that account requires the arbitrageur to deposit some money and this requirement invalidates the first assumption of arbitrage in standard finance is that arbitrage is capital free. If prices move more in one market than the other market this situation also create mess for the arbitrager, in short run arbitrager losses money and needs more capital so the model of capital free arbitrage does not apply. This situation demand deep enough pockets of money to make the profit with the probability one, if not then arbitrager may run out of money and have to liquidate his position at loss. In real scenario due to difference in trading hours, settlement dates and delivery terms in two different markets, situations become complicated for arbitrageur and create the risk of losses. This demonstrates that arbitrageur does not make money with the probability one hence arbitrageur can be experienced with unpredictable profits/returns. According to Famas (1965) classes analysis of efficient markets, CAPM (Sharpe (1965)) and APT(Ross (1976)) number of tiny arbitrageurs take infinitesimal position against mispricing in

variety of market, due their small position in the market and capital constraint , arbitrage are risk neutral. Their collective actions bring efficiency in the market and drive the prices toward its fundamental value. However arbitrage is conducted by highly specialized investors who combine knowledge with the resource of outside investor, million of little trader can not posses knowledge to engage in arbitrage. This study also examines the effectiveness of arbitrage in achieving the market efficiency. In the arbitrage trade perspective of agency relationship cannot be avoided and from agency perspective, whether arbitrage is risky or risk free, the investors wisely allocate money to the arbitrager that allocation also based upon past performance of arbitrageurs. These arbitrageurs are known as performance based and phenomenon is called performance based arbitrage. This type of arbitrage is chiefly ineffective in many situations when prices are considerably out of line and arbitrageurs are fully invested.