Chapter 21: Exploiting Arbitrage Requires Short Selling

We show that in a financial market given by semimartingales, an arbitrage opportunity, provided it exists, can only be exploited through short selling. This finding provides a theoretical basis for differences in regulation for financial services providers that are allowed to go short and those without short sales. The privilege to be allowed to short sell gives access to potential arbitrage opportunities, which creates by design a bankruptcy risk.