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 SSE, 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.
