Costly arbitrage and the myth of idiosyncratic risk

  • Pontiff J
  • 182


    Mendeley users who have this article in their library.
  • 117


    Citations of this article.


Transaction and holding costs make arbitrage costly. Mispricing exists to the extent that arbitrage costs prevent rational traders from fully eliminating inefficiencies. Although the relation between mispricing and transaction costs is well-known, the relation between mispricing and holding costs is misunderstood. One holding cost, idiosyncratic risk, is particularly misunderstood. Various myths are debunked, including the common myth that idiosyncratic risk matters because arbitrageurs only have access to a small number of projects [Shleifer and Vishny, 1997. The limits of arbitrage. The Journal of Finance 52, 35-55.]. The literature demonstrates that idiosyncratic risk is the single largest cost faced by arbitrageurs. © 2006 Elsevier B.V. All rights reserved.

Author-supplied keywords

  • Capital markets
  • Costly arbitrage
  • Idiosyncratic risk
  • Market efficiency

Get free article suggestions today

Mendeley saves you time finding and organizing research

Sign up here
Already have an account ?Sign in

Find this document


  • Jeffrey Pontiff

Cite this document

Choose a citation style from the tabs below

Save time finding and organizing research with Mendeley

Sign up for free