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“Trump has been—well politically I’m very worried, but with the market I’m hedged. When he wins, I’ll be personally disappointed in the state of our country, but I’ll financially benefit.” The stakes are even higher this time. Odds have shortened on Joe Biden entering the White House as the Democratic challenger and president Donald Trump await the results of an unprecedented election campaign.
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First, funding is segmented—certain trades rely on specific funding sources so arbitrage spreads are sensitive to localized funding shocks. Second, balance sheets are segmented—intermediaries specialize in certain arbitrages so arbitrage spreads are sensitive to idiosyncratic balance sheet shocks. Our results suggest specialization on both the asset and liability sides of intermediary balance sheets is important for understanding their role in capital markets.
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