Slow Moving Capital
Mark Mitchell (),
Lasse Pedersen and
No 6117, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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)
New Economics Papers: this item is included in nep-cfn and nep-fmk
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Journal Article: Slow Moving Capital (2007)
Working Paper: Slow Moving Capital (2007)
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