and the arbitrageur's trades reduce (or eliminate) future arbitrage opportunities. In contrast to the standard textbook … arbitrage trading strategy which has infinite present value, we show that an arbitrageur's expected discounted trading profits … are finite. In addition, we show that it is rational for arbitrageurs not to trade the first time that arbitrage profits …

represents an arbitrage opportunity. Second, we show that even if the correct factors and time varying betas are used, a non … bubble. We call this illusory arbitrage. Both facts are relevant to interpreting the existing empirical literature evaluating …