This paper investigates the systematic role of limits to arbitrage in the risk and return profile of hedge funds. We follow He et al. (2017) and define these frictions in financial markets as the shocks to the equity capital ratio of primary dealer counterparties of the New York Federal Reserve....

We analyse the potentially vulnerable and systemically relevant financial intermediation chain established by hedge funds and prime brokers. Our dataset covers the 306 largest global hedge funds and their prime brokers over the period July 2001 to December 2011. The study illustrates that hedge...

This paper presents a model on the leverage of financial intermediaries, where debt are held by risk averse agents and equity by the risk neutral. The paper shows that in an unregulated competitive market, financial intermediaries choose to be leveraged over the social best level. This is...