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Slow Moving Capital

Mark Mitchell (), Lasse Pedersen and Todd Pulvino

No 6117, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study three cases in which specialized arbitrageurs lost significant amounts of capital and, as a result, became liquidity demanders rather than providers. The effects on security markets were large and persistent: Prices dropped relative to fundamentals and the rebound took months. While multi-strategy hedge funds who were not capital constrained increased their positions, a large fraction of these funds actually acted as net sellers consistent with the view that information barriers within a firm (not just relative to outside investors) can lead to capital constraints for trading desks with mark-to-market losses. Our findings suggest that real world frictions impede arbitrage capital.

Keywords: capital constraint; convertible bond; frictions; hedge funds; limits of arbitrage; liquidity; merger arbitrage; risk management; valuation (search for similar items in EconPapers)
JEL-codes: G1 G12 G14 (search for similar items in EconPapers)
Date: 2007-02
New Economics Papers: this item is included in nep-cfn and nep-fmk
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