Discussion paper

DP6117 Slow Moving Capital

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.


Pedersen, L, M Mitchell and T Pulvino (2007), ‘DP6117 Slow Moving Capital‘, CEPR Discussion Paper No. 6117. CEPR Press, Paris & London. https://cepr.org/publications/dp6117