Funding Constraints and Market Efficiency
University of Kansas
Will J. Armstrong
Texas Tech University - Area of Finance
Sorin M. Sorescu
Texas A&M University - Department of Finance
University of California, Los Angeles (UCLA) - Finance Area
June 12, 2011
Mays Business School Research Paper No. 2012-75
We explore the premise that the degree of market efficiency changes dynamically as investment funds face time-varying funding constraints to arbitrage capital. We show that the returns to a composite long-short hedge strategy that encompasses relative value, momentum, short-run reversals, and accounting profitability, are higher when past returns to the strategy are low, and past volatility is high, which is when fund managers are particularly likely to be impeded in attracting funds. Furthermore, returns to the strategy also are higher when there are net outflows from funds that load heavily on the returns to the composite strategy. Our results support the notion that the efficiency of stock pricing is not a static concept but varies across time as agents face time varying constraints on arbitrage capital.
Number of Pages in PDF File: 51
Keywords: market efficiency, anomalies, arbitrage, funding constraints, momentum, reversal, value, profitability
JEL Classification: G12, G14working papers series
Date posted: November 30, 2010 ; Last revised: October 23, 2012
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.812 seconds