Bank-Intermediated Arbitrage

Nina Boyarchenko, Thomas Eisenbach, Pooja Gupta, Or Shachar and Peter Van Tassel

No 20181018, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Since the 2007-09 financial crisis, the prices of closely related assets have shown persistent deviations—so-called basis spreads. Because such disparities create apparent profit opportunities, the question arises of why they are not arbitraged away. In a recent Staff Report, we argue that post-crisis changes to regulation and market structure have increased the costs to banks of participating in spread-narrowing trades, creating limits to arbitrage. In addition, although one might expect hedge funds to act as arbitrageurs, we find evidence that post-crisis regulation affects not only the targeted banks but also spills over to less regulated firms that rely on bank intermediation for their arbitrage strategies.

Keywords: bank regulation; hedge funds; arbitrage (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2018-10-18
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (12)

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Working Paper: Bank-Intermediated Arbitrage (2020)
Working Paper: Bank-intermediated arbitrage (2018)
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