Slow Moving Capital

By Mark L. Mitchell, Lasse Heje Pedersen, Todd C. Pulvino. 2007

459 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/743fed6c09d53a8600dc5271a559bd4923f10518

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Citations in the corpus

Funding Liquidity Risk in a Quantitative Model of Systemic Stability (2009, unknown): “Therefore, the calibration is guided both by this empirical evidence and a top-down judgement regarding the plausible impact of a fire sale on capital.18 The calibration for θ is based on the results presented in Mitchell et al (2007).”
Carry Trades and Currency Crashes (2008, unknown): “Mitchell, Pedersen, and Pulvino (2007) document the efiect of slow moving capital in other markets.”
Convective Risk Flows in Commodity Futures Markets (2015, unknown): “2 Mitchell, Pedersen, and Pulvino (2007), Froot (2008), Adrian and Shin (2010), and He, Khang, and Krishnamurthy (2010) provide evidence for capital constraints to affect liquidity and risk premium in various asset markets such as convertible bond market, catastrophe reinsurance market, and…”
Intermediary Asset Pricing: New Evidence from Many Asset Classes (2017, background): “4Examples include Froot and O’Connell (1999), Gabaix et al. (2007), Mitchell et al. (2007), Mitchell and Pulvino (2009), and Siriwardane (2015), among others.”
Two Monetary Tools: Interest Rates and Haircuts (2011, background): “Given the wage, firm j chooses its labor demand to maximize its profit P̄ : P̄ (Kjt , A j t , w j t ) = max Ljt AjtFi(K j t , L j t)− w j tL j t .”
Hedge Fund Stock Trading in the Financial Crisis of 2007-2009 (2012, unknown): “…stocks from 13F filings to a proprietary list of hedge 1 Focusing on merge arbitrage following the 1987 crash and on convertible arbitrage in 2005, Mitchell, Pedersen, and Pulvino (2007) provide evidence that redemptions forced hedge…”
Stock Market Declines and Liquidity (2010, unknown): “Taken together, our results support a supply effect on liquidity as advocated by Kyle and Xiong (2001), Gromb and Vayanos (2002), Anshuman and Viswanathan (2005), Brunnermeier and Pedersen (2009), Garleanu and Pedersen (2007), and Mitchell et al. (2007). Furthermore, our empirical results indicate t”
Intermediary Asset Pricing (2013, unknown): “A common wisdom among many observers is that this recovery reflects the slow movement of capital into the affected markets ( Froot and O’Connell 1999; Berndt et al. 2005; Mitchell, Pedersen, and Pulvino 2007; Duffie and Strulovici 2011 .”
Time Series Momentum (2012, unknown): “(1993), Ahn, Boudoukh, Richardson, and Whitelaw (2002)).”
What Happened to the Quants in August 2007?: Evidence from Factors and Transactions Data (2010, unknown): “For example, volume is used in Brennan, Chordia and Subrahmanyam (1998), quoted bid-ask spreads and depths are used in Chordia, Roll, and Subrahmanyam (2000), and the ratio of absolute stock returns to dollar volume is proposed by Amihud (2002).”
Limited Arbitrage between Equity and Credit Markets (2012, unknown): “This is because a number of factors such as information costs (Merton (1987)), liquidity (Mitchell, Pedersen, and Pulvino (2006)), and institutional features that constrain a rapid increase in the supply of arbitrage capital are less binding with horizon.”
A Model of Capital and Crises (2012, unknown): “…asset prices, further weakening intermediary balance sheets.5 Similar capital-related phenomena have been noted in the 1987 stock-market crash (Mitchell, Pedersen, and Pulvino, 2007), the mortgage-backed securities market following an unexpected prepayment wave in 1994 (Gabaix, Krishnamurthy,…”
Asset Price Dynamics with Slow-Moving Capital (2010, background): “In related work, Mitchell, Pedersen, and Pulvino (2007) provide a range of distortions in the prices of certain assets that have appeared when arbitrageurs that specialized in these assets suffered significant losses in capital.”