GBUS 8428 ARBITRAGE

This course considers decision making from the perspective of a security arbitrageur. As the arbitrage mechanism is the foundation of all traditional finance theory, the premise of the course is that the ability to think like an arbitrageur is fundamental to understanding security market behavior. Students will develop arbitrage trading strategies appropriate for a broad variety of pricing situations and security types. Case examples include common pricing anomalies such as the Ellsberg paradox, technical trading patterns, momentum and value effects in stock returns, the forward premium puzzle, and merger arbitrage. Course discussion considers both behavioral and rational explanations and relies heavily on in-class trading simulation, analysis of current academic research, and back testing of trading strategies with historical security price data. The course builds appreciation for the practical relevance of financial theory, exposes students to current research debates on topics of behavioral finance, emphasizes the importance of trading frictions such as bid-ask spread, price impact, and arbitrage.

Academic course objectives:

· Teach students to think like arbitrageurs and develop arbitrage trading strategies

· Build students’ appreciation for the practical relevance of financial theory

· Expose students to current research debates on topics of behavioral finance

Elements of the course grade:

Class participation                               25%

Trading simulation performance         30%

Group presentation                             20%

Final exam                                           25%