Arbitrage crashes and the speed of capital

Mark Mitchell and Todd Pulvino

Journal of Financial Economics, 2012, vol. 104, issue 3, 469-490

Abstract: The imminent failure of prime brokers during the 2008 financial crisis caused a sudden decrease in the leverage afforded hedge funds. This decrease resulted from the asymmetrical payoff to rehypothecation lenders—the ultimate financiers, through prime brokers, to hedge funds. Seemingly long-term debt capital became short-term capital creating a duration mismatch between left-hand side arbitrage opportunities and right-hand side liabilities. Consequently, arbitrageurs became unable to maintain similar prices of similar assets. Mispricing magnitudes, and the time required to correct them, reflect the role of arbitrageurs in maintaining accurate prices during normal times and offer an estimate of discounts at which assets transact during crises.

Keywords: Arbitrage; Financial crisis; Hedge funds (search for similar items in EconPapers)
JEL-codes: G01 G12 G13 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (101)

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Chapter: Arbitrage Crashes and the Speed of Capital (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:104:y:2012:i:3:p:469-490

DOI: 10.1016/j.jfineco.2011.09.002

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