Slow Moving Capital
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NBER Working Paper No. 12877
Issued in January 2007
NBER Program(s): AP
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.
Published: Mark Mitchell & Lasse Heje Pedersen & Todd Pulvino, 2007.
"Slow Moving Capital,"
American Economic Review,
American Economic Association, vol. 97(2), pages 215-220, May.
This paper is available as PDF (104 K) or via email.
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