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The Geography of Funding Markets and Limits to Arbitrage

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  • Andrea Buraschi
  • Murat Menguturk
  • Emrah Sener

Abstract

We use the relative pricing of pairs of emerging market (EM) sovereign bonds issued in both dollars and euros to study capital markets frictions during periods of financial distress. During the 2007–2008 crisis, we find the emergence of large pricing anomalies in EM sovereign bond markets. Neither liquidity nor short-selling constraints can explain these persistent events. We use both cross-sectional and time-series information on these pricing anomalies to learn about specific geographical frictions in funding markets. We find support for explanations based on the interaction of banking capital-structure frictions and the fragility of wholesale funding markets. We document the effects of nonconventional policy interventions on this mispricing.

Suggested Citation

  • Andrea Buraschi & Murat Menguturk & Emrah Sener, 2015. "The Geography of Funding Markets and Limits to Arbitrage," The Review of Financial Studies, Society for Financial Studies, vol. 28(4), pages 1103-1152.
    • Handle: RePEc:oup:rfinst:v:28:y:2015:i:4:p:1103-1152.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhu090
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    Cited by:

    1. Chamon, Marcos & Schumacher, Julian & Trebesch, Christoph, 2018. "Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs?," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 114, pages 164-179.
    2. Gino Cenedese & Pasquale Della Corte & Tianyu Wang, 2021. "Currency Mispricing and Dealer Balance Sheets," Journal of Finance, American Finance Association, vol. 76(6), pages 2763-2803, December.
    3. Liao, Gordon Y., 2020. "Credit migration and covered interest rate parity," Journal of Financial Economics, Elsevier, vol. 138(2), pages 504-525.
    4. Della Corte, Pasquale & Jeanneret, Alexandre & Patelli, Ella D.S., 2023. "A credit-based theory of the currency risk premium," Journal of Financial Economics, Elsevier, vol. 149(3), pages 473-496.
    5. Zaghini, Andrea, 2017. "A tale of fragmentation: Corporate funding in the euro-area bond market," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 59-68.
    6. Geyikçi, Utku Bora & Özyıldırım, Süheyla, 2023. "Deviations from covered interest parity in the emerging markets after the global financial crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).

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