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  • 2021
  • Working Paper

Segmented Arbitrage

By: Emil Siriwardane, Adi Sunderam and Jonathan Wallen
  • Format:Print
  • | Language:English
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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 twenty-nine arbitrage spreads that we study is 22%. These low correlations are inconsistent with models in which an integrated intermediary sector faces a single constraint and sets all prices. We show that at least two types of segmentation drive arbitrage dynamics. First, funding is segmented—certain trades rely on specific funding sources so arbitrage spreads are sensitive to localized funding shocks. Second, balance sheets are segmented—intermediaries specialize in certain arbitrages so arbitrage spreads are sensitive to idiosyncratic balance sheet shocks. Our results suggest specialization on both the asset and liability sides of intermediary balance sheets is important for understanding their role in capital markets.

Keywords

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

Citation

Siriwardane, Emil, Adi Sunderam, and Jonathan Wallen. "Segmented Arbitrage." Working Paper, November 2021.
  • SSRN

About The Authors

Emil N. Siriwardane

Finance
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Adi Sunderam

Finance
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Jonathan Wallen

Finance
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    Markups to Financial Intermediation in Foreign Exchange Markets

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More from the Authors
  • The Impact of Minority Representation at Mortgage Lenders By: W. Scott Frame, Ruidi Huang, Erik J. Mayer and Adi Sunderam
  • The Cross Section of Bank Value By: Mark Egan, Stefan Lewellen and Adi Sunderam
  • Markups to Financial Intermediation in Foreign Exchange Markets By: Jonathan Wallen
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