Academics Research on Arbitrage

• Thearbitragetheory of capital asset pricing, Ross, S. A. (2013). The arbitrage theory of capital asset pricing. InHandbook of the Fundamentals of Financial Decision Making: Part I (pp. 11-30). The purpose of this paper is to examine rigorously the arbitrage model of capital asset pricing developed in Ross [13, 14]. The arbitrage model was proposed as an alternative to the mean variance capital asset pricing model, introduced by Sharpe, Lintner, and Treynor, that has become the major analytic tool for explaining phenomena observed in capital markets for risky assets. The principal relation that emerges from the mean variance model holds that for any asset,i, its (ex ante) expected returnwhereis the riskless rate of interest, is the expected excess return on the market,Em, andis the beta coefficient on the market, wherem2is the variance of the market portfolio andis the covariance between the returns on the ith asset and the market portfolio. (If a riskless asset does not exist,is the zero-beta return, i.e., the return on all portfolios uncorrelated with the market portfolio) 
• The limits ofarbitrage, Shleifer, A., & Vishny, R. W. (1997). The limits of arbitrage.The Journal of finance,52(1), 35-55. Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people's capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them.
• An empirical investigation of thearbitragepricing theory, Roll, R., & Ross, S. A. (1980). An empirical investigation of the arbitrage pricing theory.The Journal of Finance,35(5), 1073-1103. Empirical tests are reported for Ross' [48] arbitrage theory of asset pricing. Using data for individual equities during the 196272 period, at least three and probably four priced factors are found in the generating process of returns. The theory is supported in that estimated expected returns depend on estimated factor loadings, and variables such as the own standard deviation, though highly correlated (simply) with estimated expected returns, do not add any further explanatory power to that of the factor loadings.
• Arbitragewith fractional Brownian motion, Rogers, L. C. G. (1997). Arbitrage with fractional Brownian motion.Mathematical Finance,7(1), 95-105. Fractional Brownian motion has been suggested as a model for the movement of log share prices which would allow longrange dependence between returns on different days. While this is true, it also allows arbitrage opportunities, which we demonstrate both indirectly and by constructing such an arbitrage. Nonetheless, it is possible by looking at a process similar to the fractional Brownian motion to model longrange dependence of returns while avoiding arbitrage.
• Covered interestarbitrage: Unexploited profits?, Frenkel, J. A., & Levich, R. M. (1975). Covered interest arbitrage: Unexploited profits?.Journal of Political Economy,83(2), 325-338. Empirical studies of covered interest arbitrage suggest that the parity condition is not always satisfied and thus implying unexploited profit opportunities. This paper provides a procedure for estimating transaction costs in the markets for foreign exchange and for securities. Allowance for these costs accounts for most of the apparent profit opportunities. It is shown that in addition to transaction costs, demand and supply elasticities in the various markets and lags in executing arbitrage can account for all of the apparent profit opportunities. It is concluded that empirical data are consistent with the interest parity theory and that covered interest arbitrage does not entail unexploited profit opportunities.