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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.
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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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More from the Authors
  • Pershing Square's Pandemic Trade Teaching Note Courseware By: Luis M. Viceira and Emil N. Siriwardane
  • OTC Intermediaries By: Andrea L. Eisfeldt, Bernard Herskovic, Sriram Rajan and Emil Siriwardane
  • Dicerna By: Malcolm Baker, Ishita Sen and Jonathan Wallen
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