Pricing with Almost-Arbitrages
with Chase P. Ross, December 2019.
We calculate realistic returns to more than 120 collateralized, bank-intermediated arbitrage identities to proxy for daily changes in intermediaries’ marginal value of wealth. Increased leverage constraints mean intermediaries delever, and arbitrage returns grow. Large arbitrage returns correspond to high marginal values of intermediaries’ wealth. We show how the marginal investor changes over time.