Bank-intermediated arbitrage
We argue that post-crisis bank regulation can explain large, persistent deviations from parity on basis trades requiring leverage. Documenting the financing cost and balance sheet impact on a broad array of basis trades for regulated institutions, we show that the implied return on equity on such trades is considerably lower under post-crisis regulation. In addition, although hedge funds would serve as natural alternative arbitrageurs, we document that funds reliant on leverage from a global systemically important bank suffer significant declines in assets and returns relative to unlevered funds. Thus, post-crisis regulation not only affects the targeted banks directly but also spills over to unregulated firms that rely on bank intermediation for their arbitrage strategies.
Year of publication: |
2018
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Authors: | Boyarchenko, Nina ; Eisenbach, Thomas M. ; Gupta, Pooja ; Shachar, Or ; Van Tassel, Peter |
Publisher: |
New York, NY : Federal Reserve Bank of New York |
Subject: | bank regulation | arbitrage | hedge funds |
Saved in:
freely available
Series: | Staff Report ; 858 |
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Type of publication: | Book / Working Paper |
Type of publication (narrower categories): | Working Paper |
Language: | English |
Other identifiers: | 1026029503 [GVK] hdl:10419/210710 [Handle] |
Classification: | G01 - Financial Crises ; G21 - Banks; Other Depository Institutions; Mortgages ; G23 - Pension Funds; Other Private Financial Institutions ; G28 - Government Policy and Regulation |
Source: |
Persistent link: https://www.econbiz.de/10012144701