Evidence on the Profitability of Credit Card Arbitrage

Financial Services Review, Vol. 17, No, 1, pp. 31-48, 2008

Posted: 30 Aug 2009 Last revised: 4 Mar 2010

See all articles by Terrance Jalbert

Terrance Jalbert

University of Hawaii - Department of Business Administration

Jonathan D. Stewart

Abilene Christian University

Mercedes Jalbert

The Institute for Business and Finance Research

Date Written: 2008

Abstract

Financial institutions frequently offer low introductory interest rates to entice individuals to open and use credit accounts with their firm. This paper examines the possibility of earning arbitrage profits by taking advantage of these special offers. We develop a formula to measure the profit potential from undertaking credit card arbitrage and identify conditions conducive to profitable and unprofitable arbitrage. In addition, we examine the sensitivity of the arbitrage transaction to changes in interest rates, interest rate levels, and fees. Finally, we examine the impact of credit card arbitrage on the credit rating of the arbitrageur.

Keywords: credit cards, arbitrage

JEL Classification: G1, G2

Suggested Citation

Jalbert, Terrance and Stewart, Jonathan D. and Jalbert, Mercedes, Evidence on the Profitability of Credit Card Arbitrage (2008). Financial Services Review, Vol. 17, No, 1, pp. 31-48, 2008, Available at SSRN: https://ssrn.com/abstract=1464193

Terrance Jalbert (Contact Author)

University of Hawaii - Department of Business Administration ( email )

808-974-7456 (Phone)

Jonathan D. Stewart

Abilene Christian University ( email )

Abilene, TX 79699
United States

Mercedes Jalbert

The Institute for Business and Finance Research ( email )

P.O. Box 5569
Hilo, HI 96720
United States

HOME PAGE: http://www.theIBFR.com

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