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  • 2022
  • Working Paper

Segmented Arbitrage

By: Emil Siriwardane, Adi Sunderam and Jonathan L. Wallen
  • Format:Print
  • | Language:English
  • | Pages:60
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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.

Keywords

Financial Intermediation; Arbitrage; Intermediary-based Asset Pricing; Finance; Segmentation

Citation

Siriwardane, Emil, Adi Sunderam, and Jonathan L. Wallen. "Segmented Arbitrage." NBER Working Paper Series, No. 30561, November 2021.
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About The Authors

Emil N. Siriwardane

Finance
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Adi Sunderam

Finance
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Jonathan L. Wallen

Finance
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More from the Authors

    • November 2023
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    • 2023
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    The Imperfect Intermediation of Money-Like Assets

    By: Jonathan Wallen and Jeremy C. Stein
    • June 2023
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    Optimalen Capital Spreadsheet Supplement

    By: Malcolm Baker, Elisabeth Kempf and Jonathan Wallen
More from the Authors
  • A Quantity-Driven Theory of Term Premia and Exchange Rates By: Robin Greenwood, Samuel G. Hanson, Jeremy C. Stein and Adi Sunderam
  • The Imperfect Intermediation of Money-Like Assets By: Jonathan Wallen and Jeremy C. Stein
  • Optimalen Capital Spreadsheet Supplement By: Malcolm Baker, Elisabeth Kempf and Jonathan Wallen
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