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.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
6117.
Mark Mitchell & Lasse Heje Pedersen & Todd Pulvino, 2007.
"Slow Moving Capital,"
American Economic Review,
American Economic Association, vol. 97(2), pages 215-220, May.
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Paper
Mark Mitchell & Lasse Heje Pedersen & Todd Pulvino, 2007.
"Slow Moving Capital,"
NBER Working Papers
12877, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Find related papers by JEL classification: G1 - Financial Economics - - General Financial Markets G12 - Financial Economics - - General Financial Markets - - - Asset Pricing G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2008.
"Carry Trades and Currency Crashes,"
NBER Working Papers
14473, National Bureau of Economic Research, Inc.
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Other versions:
Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2008.
"Carry Trades and Currency Crashes,"
NBER Chapters,
in: NBER Macroeconomics Annual 2008
National Bureau of Economic Research, Inc.
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