Thus, if one had sold the 30-year short, bought the 29½-year, and waits a few months, one profits from the change in the liquidity premium.
Arbitrage is a stricter notion, referring to trading in identical assets or cash flows, while relative value is a looser notion, referring to using valuation methods (value investing) to take long-short positions in similar assets without necessarily assuming convergence, and is more associated with equities.
Thus if prices diverge so that the trade temporarily loses money, and the trader is accordingly required to post margin (faces a margin call), the trader may run out of capital (if they run out of cash and cannot borrow more) and go bankrupt even though the trades may be expected to ultimately make money.
[4] Further, if other market participants are aware of the positions, they can engineer such price divergences, driving the convergence trader into bankruptcy – compare short squeeze.
As with arbitrage, convergence trading has negative skew in return distributions it produces, resulting from the concave payoff characteristic of most such high-probability low-return strategies.