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Convergence trading, arbitrage and systemic risk in the United States
[Convergence trading, arbitrage et risque systémique aux États-Unis]

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  • Dastarac Hugues

Abstract

Convergence trading, especially arbitrage, is used on a large scale by investment banks and hedge funds, and contributes to the smooth integration of financial markets. However, it is also a source of systemic risk, as the transactions involve short-term debt that can be cut off by the creditor in times of market stress. In this case, arbitrageurs are forced to rapidly unwind their positions, leading to abnormal falls and divergences in asset prices. This risk materialised in the US Treasury market during the crises of 1998 – with the collapse of the hedge fund Long Term Capital Management (LTCM) – and of 2008, but ultimately proved contained in the 2020 health crisis. The intervention or non-intervention in the market of the US Federal Reserve can be linked to the severity of the financial crises. Le convergence trading et en particulier l’arbitrage, pratiqué à grande échelle par les banques d’investissement et les fonds spéculatifs (hedge funds), contribue à la bonne intégration des marchés financiers. Mais il engendre aussi un risque systémique, dans la mesure où cette opération implique un endettement de court terme qui peut s’interrompre en période de tension sur les marchés. Les arbitragistes sont alors forcés de liquider en urgence leurs positions, entraînant des chutes et des écarts anormaux de prix d’actifs. Ce risque s’est matérialisé aux États-Unis, sur le marché des emprunts du Trésor, au cours des crises de 1998 – avec la faillite du fonds LTCM – et de 2008, mais a finalement été contenu lors de la crise sanitaire de 2020. L’intervention ou la non-intervention de la Réserve fédérale sur ce marché peut être mise en relation avec la sévérité des crises financières.

Suggested Citation

  • Dastarac Hugues, 2021. "Convergence trading, arbitrage and systemic risk in the United States [Convergence trading, arbitrage et risque systémique aux États-Unis]," Bulletin de la Banque de France, Banque de France, issue 235.
    • Handle: RePEc:bfr:bullbf:2021:235:01
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    References listed on IDEAS

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    5. Hugues Dastarac, 2020. "Market Making and Proprietary Trading in the US Corporate Bond Market," Working papers 754, Banque de France.
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