Considers noise trader risk in the agency context of professional arbitrage. It elaborates on a performance‐based arbitrage model where arbitrageurs are affected by the inability of their investors to separate luck from skill, shedding further doubt on the effectiveness of arbitrage in achieving market efficiency. At the end, the chapter also briefly discusses the turbulence of financial markets in the summer of 1998, when Russia defaulted most of its debt, which vividly illustrated the limits of arbitrage.
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