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Segmented Arbitrage

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  • EMIL N. SIRIWARDANE
  • ADI SUNDERAM
  • JONATHAN WALLEN

Abstract

We use arbitrage activity in equity, fixed income, and foreign exchange markets to characterize the frictions and constraints facing intermediaries. The average pairwise correlation between the 32 arbitrage spreads that we study is 22%. These low correlations are inconsistent with canonical intermediary asset pricing models. We show that at least two types of segmentation drive arbitrage dynamics. First, funding is segmented—certain trades rely on specific funding sources, making their arbitrage spreads sensitive to localized funding shocks. Second, balance sheets are segmented—intermediaries specialize in certain trades, so arbitrage spreads are sensitive to idiosyncratic balance‐sheet shocks.

Suggested Citation

  • Emil N. Siriwardane & Adi Sunderam & Jonathan Wallen, 2025. "Segmented Arbitrage," Journal of Finance, American Finance Association, vol. 80(5), pages 2543-2590, October.
    • Handle: RePEc:bla:jfinan:v:80:y:2025:i:5:p:2543-2590
    DOI: 10.1111/jofi.13469
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