Are Arbitrageurs Less Affected by Behavioral Biases? Evidence from the Cryptocurrency Market

Behavioral biases are well-documented among less sophisticated investors. Are arbitrageurs less affected by these issues? To explore this question, we analyze account-level trading data from a leading cryptocurrency exchange in India and use triangular arbitrage opportunities to identify arbitrageurs and noise traders. While arbitrageurs outperform noise traders, we find that they are not immune to behavioral biases. In fact, arbitrageurs often exhibit higher levels of biases, and their returns are also more negatively impacted by a composite behavioral bias index than those of noise traders. Our results suggest that the classical rational assumption about arbitrageurs may be problematic when applied to newly emerged markets, such as cryptocurrencies, which could have important normative implications.