Citation

Discussion Paper Details

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Full Details

Title: Slow Moving Capital

Author(s): Mark Mitchell, Lasse Heje Pedersen and Todd Pulvino

Publication Date: February 2007

Keyword(s): capital constraint, convertible bond, frictions, hedge funds, limits of arbitrage, liquidity, merger arbitrage, risk management and valuation

Programme Area(s): Financial Economics

Abstract: 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.

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Bibliographic Reference

Mitchell, M, Pedersen, L and Pulvino, T. 2007. 'Slow Moving Capital'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6117