The term stale price arbitrage refers to the ability to profit from the price of securities that do not reflect all of the available market information. Stale price arbitrage is possible because securities are traded on exchanges located in different time zones.
While stock exchanges are considered efficient markets, there are instances when the mispricing of one or more securities provides the opportunity for profits through techniques such as stale price arbitrage. This condition can exist when the same securities are traded on exchanges that close at different times. For this reason, stale price arbitrage occurs more frequently with international equities.
The most commonly cited example of stale price arbitrage has to do with mutual funds. In this example, the fund's NAV at 4:00 PM ET is based on the price of the securities that closed earlier on foreign markets. If a trader had knowledge of events that would affect the fund's NAV after the foreign market's close, they could predict the movement of the fund's NAV on the following day.
Stale price arbitrage can also occur when events cause an entire market to rise or fall sharply. For example, poor economic news might cause a sharp decline in all the equities traded on an Asian market several hours before markets in the United States open. A trader might hypothesize that the impact of this poor economic news might carry over into the U.S. market and decide to sell securities short.
statistical arbitrage, selling short against the box, arbitrage bonds, international arbitrage, discount arbitrage
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