Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of New York
Staff Reports
Bank-intermediated arbitrage
Nina Boyarchenko
Thomas M. Eisenbach
Pooja Gupta
Or Shachar
Peter Van Tassel

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.

Download Full text
Download Full text
Cite this item
Nina Boyarchenko & Thomas M. Eisenbach & Pooja Gupta & Or Shachar & Peter Van Tassel, Bank-intermediated arbitrage, Federal Reserve Bank of New York, Staff Reports 858, 01 Jun 2018, revised 01 Jul 2018.
More from this series
JEL Classification:
Subject headings:
Keywords: bank regulation; arbitrage; hedge funds
For corrections, contact Amy Farber ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal