The Department of Finance and FRIC, Center for Financial Frictions, are proud to announce the upcoming virtual seminar with Adi Sunderam, Harvard Business School.
Adi Sunderam will present:
We use the cross section of arbitrage spreads in equity, fixed income, and foreign exchange markets to shed light on frictions and constraints facing specialized intermediaries. Within markets, arbitrage spreads exhibit a strong factor structure and similar levels. Across markets in contrast, the correlation between arbitrage spreads is low and their average levels vary significantly. This is inconsistent with models where a single integrated intermediary sector facing a single constraint sets all prices. We also show that the data are inconsistent with models where a different set of intermediaries set prices in each market. For instance, we show that arbitrages involving unsecured funding all comove strongly. Overall, our results suggest specialization on both the asset and liability sides of intermediary balance sheets are important for understanding violations of the law of one price.