【summary】
Negative Arbitrage refers to a situation in which, although there is an apparent price difference, sufficient profits cannot be obtained by using the difference, or a loss occurs when costs and risks are deducted.
In investment practice, this is a concept used in M&A arbitrage, spin-off investment, bond management, financing, etc.
The point that beginners should learn is not ``Is there a price difference?'' but does that price difference exceed the fees, interest rates, taxes, liquidity, time, and break-up risk? In this article, we will explain the mechanism of negative arbitrage and representative examples in an easy-to-understand manner.
What is arbitrage?
First of all, what is arbitrage?
Aiming for profit by buying and selling assets with almost the same risk and value but different prices
is.
For example, suppose the same asset is traded as follows:
| Market | Price |
|---|---|
| A market | 100 yen |
| B market | 105 yen |
in this case,
- Buy at A market for 100 yen
- Sell for 105 yen on B market
In theory, you can aim for a profit of 5 yen.
However, for actual investing, commissions, spreads, taxes, interest, holding costs, and execution risks must be subtracted from this.
Related article: What is arbitrage? A mechanism to generate profits from market price differences
What is negative arbitrage?
Negative arbitrage is a situation where there is a price difference but there is no actual profit.
The reason is simple.
Investments have costs.
- Trading fee
- Spread
- Interest rate *Tax
- Exchange costs *Holding cost *Liquidity risk
- Time risk
As a result, even though there is an apparent price difference,
利益 < コスト + リスクIt may be.
This is negative arbitrage.
What beginners tend to run into is looking only at the price difference on the screen and deciding it's a good deal. What is important in investing is not the price difference itself, but what remains after the deduction.
Example in M&A arbitrage
An easy way to understand negative arbitrage is M&A arbitrage.
For example, suppose Company A announces that it will acquire Company B for $100 a share.
However, Company B's stock is trading at $95 on the market.
At first glance,
95ドルで買う
↓
買収完了時に100ドルで受け取る
↓
5ドルの利益It looks like
However, in reality, there are the following risks:
- Risk of acquisition falling apart
- Regulatory review *Shareholder approval
- Duration until completion
- Funds tied up
- Stock price decline when deal breaks down
If the acquisition takes a year to close and the stock could fall to $70 when the deal breaks, the $5 difference from $95 to $100 may not be as attractive as it seems.
In this case, what investors should be looking at is not the "$5 price difference";
成立確率 × 成立時利益
-
破談確率 × 破談時損失
-
資金拘束コストis.
If you calculate this, the expected return may be low or negative.
Relationship with spin-off investments
Even with spin-off investments, situations similar to negative arbitrage can occur.
In spin-offs, the market may appear to undervalue the new company.
for example,
- New company separated from parent company becomes small-cap stock
- Excluded from ownership by institutional investors
- Excluded from index *Low liquidity
- Business explanation is not yet fully understood
For these reasons, stock prices may appear to be undervalued.
However, there may be a reason for its low price.
- High business risk
- Weak financial structure *Liquidity is too low
- I can't sell when I want to sell *Additional selling pressure remains
in this case,
見かけ上の割安
-
流動性・事業・需給リスク
=
期待ほど儲からないThis is the composition.
Spin-off investments are an attractive theme, but it is necessary to determine whether they are `undervalued that the market has overlooked'' or `undervalued that the market correctly dislikes.''
Related article: What is spin-off investment? Advantages and points to note when investing in a company that separates from its parent company
Example in bond market/funding
Negative arbitrage is also used in bond markets and fundraising.
For example, consider a case where a company has raised funds by issuing bonds, but has not yet decided how to use the funds.
| Item | Yield/interest rate |
|---|---|
| Corporate bond funding interest rate | 5% |
| Temporary deposit interest rate | 3% |
in this case,
5%を支払う
3%しか受け取れないTherefore, there will be a minus of 2% of the difference.
This is also called negative arbitrage.
Sometimes it makes sense to raise money early. These include future large investments, refinancing, acquisition funds, and ensuring financial security.
However, if there is a long period in which the company can only operate at a yield lower than the procurement cost, it will be a negative factor for corporate value.
Negative arbitrage that also happens to individual investors
Negative arbitrage is not just for professional investors.
A similar structure exists for individual investors.
for example,
- I bought a high-dividend stock on margin, but the benefits of dividends are diminished by interest rates and fees.
- I aimed at the price difference between exchanges for crypto assets, but the price difference disappeared during the transfer.
- I bought stocks for preferential treatment, but due to the drop in stock prices and commission fees, I ended up incurring a loss that exceeded the preferential value.
- I bought it thinking it was an undervalued stock, but it's illiquid and the price will drop significantly when I sell it.
In these cases, the apparent benefits and perceived value are outweighed by the actual costs and risks.
Points that investors should learn
For beginners,
安い = お得I tend to think that.
But in investment,
なぜ安いのかneed to understand.
Items to check are as follows.
| Check items | Points to see |
|---|---|
| Liquidity | Can you sell when you want to sell |
| Financial situation | Is the reason for the low price due to financial instability |
| Regulatory risk | Are there any regulatory barriers to M&A or business continuity |
| Interest cost | Does it exceed the cost of financing and credit transactions |
| Holding period | Are funds tied up too long |
| Taxes and fees | Are you eliminating apparent profits? |
| Downside risk | How much it will go down in case of failure |
Just looking at the price difference is not enough. You need to discount the price difference by cost and risk and see if it still makes sense to invest.
Common Misconceptions
Misconception 1: You can make money if there is a price difference
No.
The costs may exceed the benefits.
The price difference is just the beginning. In reality, you need to look at the profit after fees, spreads, interest, taxes, and liquidity.
Myth 2: Undervalued stocks are always corrected.
No.
Sometimes the market is valuing it correctly.
Reasons why stocks that appear to be cheap may be left alone for a long time include low growth, financial instability, lack of liquidity, governance issues, and structural selling pressure.
Myth 3: Arbitrage is risk-free
No.
In real arbitrage,
- Execution risk *Liquidity risk
- Time risk
- Risk of deal breakage
- System risk
There is.
“Theoretical arbitrage” and “arbitrage that can actually determine profits” are two different things.
summary
What is negative arbitrage?
There is a price difference, but even if you take advantage of it, you will not be able to make a sufficient profit, or you will end up losing money.
means.
What is important for investors is
Is there a price difference?
rather than
Does the price difference outweigh the costs and risks?
is.
Whether it's M&A arbitrage, spin-off investment, bond management, margin trading, or price differential trading of crypto assets, it's easy to fail if you judge based solely on the apparent undervalue.
There's a reason things are cheap. Is the reason for this a market oversight or a legitimate risk assessment? Discerning this is the most important task for investors.
source
- Japan Exchange Group “Glossary: Arbitrage”
- Japan Exchange Group “Outline of margin trading”
- Japan Securities Dealers Association “[Basic knowledge about public and corporate bonds] (https://www.jsda.or.jp/jikan/qa/043.html)”
- Related article: What is arbitrage? A mechanism to generate profits from market price differences
- Related article: What is spin-off investment? Advantages and points to note when investing in a company that separates from its parent company