Opaque Trading, Disclosure and Asset Prices: Implications for Hedge Fund Regulation
Cornell University - Department of Economics
Cornell University - Samuel Curtis Johnson Graduate School of Management
University of Toronto - Rotman School of Management
November 1, 2012
Review of Financial Studies, 2014, 27(4): 1190-1237
AFA 2013 San Diego Meetings Paper
Rotman School of Management Working Paper No. 1945347
Johnson School Research Paper Series No. 53-2011
We investigate the effect of ambiguity about hedge fund investment strategies on asset prices and aggregate welfare. We model some traders (mutual funds) as facing ambiguity about the equilibrium trading strategies of other traders (hedge funds). This ambiguity limits the ability of mutual funds to infer information from prices and has negative effects on market outcomes. We use this analysis to investigate the implications of regulations that affect disclosure requirements of hedge funds or the cost of operating a hedge fund. Our analysis demonstrates how regulations affect asset prices and welfare through their influence on opaque trading.
Number of Pages in PDF File: 60
Keywords: Opaque trading, asset prices, welfare, regulation
JEL Classification: G14, G12, G11, D82
Date posted: October 17, 2011 ; Last revised: February 26, 2016
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