Slow Moving Capital

19 Pages Posted: 16 May 2008

See all articles by Mark L. Mitchell

Mark L. Mitchell

University of Chicago - Booth School of Business; AQR Arbitrage, LLC

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Todd C. Pulvino

AQR Capital Management, LLC; CNH Partners

Multiple version iconThere are 3 versions of this paper

Date Written: February 2007

Abstract

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.

Keywords: Capital constraint, convertible bond, frictions, hedge funds, limits of arbitrage, liquidity, merger arbitrage, risk management, valuation

JEL Classification: G1, G12, G14

Suggested Citation

Mitchell, Mark L. and Pedersen, Lasse Heje and Pulvino, Todd C., Slow Moving Capital (February 2007). CEPR Discussion Paper No. DP6117, Available at SSRN: https://ssrn.com/abstract=1133762

Mark L. Mitchell (Contact Author)

University of Chicago - Booth School of Business ( email )

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Lasse Heje Pedersen

AQR Capital Management, LLC ( email )

Greenwich, CT
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Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Todd C. Pulvino

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

CNH Partners ( email )

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Greenwich, CT 06830
United States
203-742-3002 (Phone)
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