FRIC Research Seminar with Nina Boyarchenko, Federal Reserve Bank of New York
The FRIC center and the Department of Finance are happy to announce the upcoming seminar with Nina Boyarchenko, Federal Reserve Bank of New
Nina Boyarchenko will present
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 of 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. Moreover, the greatest increases in the level of the basis and the greatest decreases in implied return on equity occur for trades with the biggest increases in balance sheet impact. Though hedge funds would serve as natural alternative arbitrageurs to regulated institutions, 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.
You can find the paper here:
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