Dislocations occur when financial markets, operating under stressful conditions, experience large,
widespread asset mispricings. This study documents systematic financial market dislocations in
world capital markets and the importance of their fluctuations for expected asset returns. Our
novel, model-free measure of these dislocations is a monthly average of six hundred abnormal
absolute violations of three textbook arbitrage parities in stock, foreign exchange, and money
markets. We find that investors demand economically and statistically significant risk premiums
to hold financial assets performing poorly during market dislocations.