Segmented Arbitrage

73 Pages Posted: 10 Nov 2021 Last revised: 20 Nov 2023

See all articles by Emil Siriwardane

Emil Siriwardane

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Aditya Sunderam

Harvard University

Jonathan Wallen

Harvard Business School

Multiple version iconThere are 2 versions of this paper

Date Written: November 2023


We use arbitrage activity in equity, fixed income, and foreign exchange markets to characterize the frictions and constraints facing intermediaries. The average pairwise correlation between the 32 arbitrage spreads that we study is 22%. These low correlations are inconsistent with canonical intermediary asset pricing models. We show that at least two types of segmentation drive arbitrage dynamics. First, funding is segmented—certain trades rely on specific funding sources, making their arbitrage spreads sensitive to localized funding shocks. Second, balance sheets are segmented—intermediaries specialize in certain trades, so arbitrage spreads are sensitive to idiosyncratic balance sheet shocks.

Keywords: arbitrage; segmentation; intermediary-based asset pricing

JEL Classification: G12, G2

Suggested Citation

Siriwardane, Emil and Sunderam, Aditya and Wallen, Jonathan, Segmented Arbitrage (November 2023). Available at SSRN: or

Emil Siriwardane (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Aditya Sunderam

Harvard University ( email )

Jonathan Wallen

Harvard Business School ( email )

Boston, MA 02163
United States

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