So the curriculum says that managers can exploit inefficiencies both behavioral and structural inefficiencies.
It further says that structural inefficiency is based on regulation changes and it is more long-term and doesn’t converge. So if it doesn’t converge, how are we exploring this mispricing?
For instance, think of any of yer domestic index futures in foreign country. You can exploit the difference in timezones and benefit. That s permanent but then again arbitrage is exploited by many participants.
no but i mean the structural arbitrage. Cuz the book says its a permanent change. So the question is if its permanent, it means its not reverting to its mean. Thats where I am confused on how we can exploit it
Mean reverting is not essential for arbitrage per say
Like two instruments that should have same intrinsic value or some relationship is enough to implement the strategy by long short.
( This can be seen even in hard catalyst merger arbitrage example in curriculum)