Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/210710
Authors: 
Boyarchenko, Nina
Eisenbach, Thomas M.
Gupta, Pooja
Shachar, Or
Van Tassel, Peter
Year of Publication: 
2018
Series/Report no.: 
Staff Report No. 858
Abstract: 
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 on 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. In addition, although hedge funds would serve as natural alternative arbitrageurs, 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.
Subjects: 
bank regulation
arbitrage
hedge funds
JEL: 
G01
G21
G23
G28
Document Type: 
Working Paper

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