Segmented Arbitrage / Emil Siriwardane, Adi Sunderam, Jonathan L. Wallen.

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Siriwardane, Emil

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w30561.Publication details: Cambridge, Mass. National Bureau of Economic Research 2022.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We use arbitrage activity in equity, fixed income, and foreign exchange markets to characterize the frictions and constraints facing intermediaries. The average pairwise correlation between the 29 arbitrage spreads that we study is 21%. These low correlations are inconsistent with canonical intermediary asset pricing models. We show that at least two types of segmentation drive arbitrage dynamics. First, funding is segmented--certain trades rely on specific funding sources, making their arbitrage spreads sensitive to localized funding shocks. Second, balance sheets are segmented--intermediaries specialize in certain trades, so arbitrage spreads are sensitive to idiosyncratic balance sheet shocks.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w30561 (Browse shelf(Opens below))	Not For Loan

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October 2022.

We use arbitrage activity in equity, fixed income, and foreign exchange markets to characterize the frictions and constraints facing intermediaries. The average pairwise correlation between the 29 arbitrage spreads that we study is 21%. These low correlations are inconsistent with canonical intermediary asset pricing models. We show that at least two types of segmentation drive arbitrage dynamics. First, funding is segmented--certain trades rely on specific funding sources, making their arbitrage spreads sensitive to localized funding shocks. Second, balance sheets are segmented--intermediaries specialize in certain trades, so arbitrage spreads are sensitive to idiosyncratic balance sheet shocks.