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Opaque Trading, Disclosure and Asset Prices: Implications for Hedge Fund Regulation


David Easley


Cornell University - Department of Economics

Maureen O'Hara


Cornell University - Samuel Curtis Johnson Graduate School of Management

Liyan Yang


University of Toronto - Rotman School of Management
November 1, 2012

Rotman School of Management Working Paper No. 1945347
AFA 2013 San Diego Meetings Paper
Johnson School Research Paper Series No. 53-2011

Abstract:     
We investigate the effect of ambiguity about hedge fund investment strategies on market efficiency 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 performance. 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: 44

Keywords: Opaque trading, asset prices, welfare, regulation

JEL Classification: G14, G12, G11, D82

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Date posted: October 17, 2011 ; Last revised: December 11, 2012

Suggested Citation

Easley, David, O'Hara, Maureen and Yang, Liyan, Opaque Trading, Disclosure and Asset Prices: Implications for Hedge Fund Regulation (November 1, 2012). Rotman School of Management Working Paper No. 1945347; AFA 2013 San Diego Meetings Paper; Johnson School Research Paper Series No. 53-2011. Available at SSRN: http://ssrn.com/abstract=1945347 or http://dx.doi.org/10.2139/ssrn.1945347

Contact Information

David Easley
Cornell University - Department of Economics ( email )
414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6283 (Phone)
607-255-2818 (Fax)
Maureen O'Hara
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)
Liyan Yang (Contact Author)
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada

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