On the theory side, research has proceeded along two distinct fronts. First, one needs to explain what prevents rational arbitrageurs from eliminating these and other predictable patterns in returns. Work in this “limits to arbitrage” vein has focused on the risks and market frictions that arbitrageurs face. These include simple transactional impediments, like short-selling constraints, as well as a variety of other complications. Potential arbitrageurs face the risk that when they bet against a given mispricing, this mispricing may subsequently worsen, with the ultimate correction coming only much later (DeLong et al., 1990; Shleifer and.
