How Does the Concept of “Market Efficiency” Relate to the Persistence of Arbitrage Opportunities?

The efficient market hypothesis (EMH) suggests that arbitrage opportunities should be fleeting and short-lived. In a truly efficient market, as soon as a mispricing occurs, arbitrageurs immediately exploit it, which quickly forces the prices back into alignment.

Therefore, the persistence of any noticeable arbitrage opportunity implies a degree of market inefficiency, often due to factors like transaction costs, capital constraints, or information asymmetry.