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Arbitrage Crashes and the Speed of Capital

In: Market Institutions and Financial Market Risk

Author

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  • Mark Mitchell
  • Todd Pulvino

Abstract

The imminent failure of prime brokers during the 2008 financial crisis caused a sudden decrease in the leverage afforded hedge funds. This decrease resulted from the asymmetrical payoff to rehypothecation lenders—the ultimate financiers, through prime brokers, to hedge funds. Seemingly long-term debt capital became short-term capital creating a duration mismatch between left-hand side arbitrage opportunities and right-hand side liabilities. Consequently, arbitrageurs became unable to maintain similar prices of similar assets. Mispricing magnitudes, and the time required to correct them, reflect the role of arbitrageurs in maintaining accurate prices during normal times and offer an estimate of discounts at which assets transact during crises.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Mark Mitchell & Todd Pulvino, 2010. "Arbitrage Crashes and the Speed of Capital," NBER Chapters, in: Market Institutions and Financial Market Risk, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:13181
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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