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Arbitrage and Short Selling: A Political Economy Approach

Author: Paola Robotti

CSGR Working paper 205/06

Arbitrage and short selling are investment strategies that epitomise a particular mode of investment: smart, sophisticated, and efficiency-enhancing (as described within mainstream finance). Yet many market events of the recent financial history point to a less benign face of this practice. Short selling in particular can be associated with manipulative strategies that do not add much to the efficiency of the market but rather hinder the interests of various categories of market actors, notably long-term investors and corporate actors. Despite pointing to important aspects of the capitalist relationships created by contemporary financial markets, these topics have gone unnoticed in international political economy. This article shows that a political-economy approach to arbitrage would provide important insights into the role that financial theories play in the formulation of regulatory decisions and into the impact that these decisions have on different classes of market actors.