EMIL N. SIRIWARDANE, ADI SUNDERAM, JONATHAN WALLEN
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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.
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The Journal of Finance is a renowned publication that disseminates cutting-edge research across all major fields of financial inquiry. Widely regarded as the most cited academic journal in finance, each issue reaches over 8,000 academics, finance professionals, libraries, government entities, and financial institutions worldwide. Published bi-monthly, the journal serves as the official publication of The American Finance Association, the premier academic organization dedicated to advancing knowledge and understanding in financial economics. Join us in exploring the forefront of financial research and scholarship.
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