Abstract

http://ssrn.com/abstract=2121495
 
 

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The Role of Hedge Funds in the Security Price Formation Process


Charles Cao


Pennsylvania State University

Yong Chen


Texas A&M University - Department of Finance

William N. Goetzmann


Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Bing Liang


University of Massachusetts at Amherst - Department of Finance & Operations Management; China Academy of Financial Research (CAFR)

August 25, 2013


Abstract:     
We present evidence on the role of hedge funds in the price formation process by using data on hedge fund equity ownership. Compared to other institutional investors, hedge funds tend to hold stocks that plot above the security market plane (positive alpha stocks). Focusing on the set of stocks plotting above the security market plane, we find that, in the cross-section of stocks, hedge fund ownership and trading is positively related to the degree of mispricing and arbitrage costs. We also document that a change in hedge fund investment is informative about future stock returns over the horizon of one quarter. Overall, these findings suggest that hedge funds play an important role in reducing asset mispricing.

Number of Pages in PDF File: 60

Keywords: Hedge fund holdings, positive alpha stocks, alphas, arbitrage costs, investment value

JEL Classification: G11, G23

working papers series





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Date posted: August 2, 2012 ; Last revised: August 29, 2013

Suggested Citation

Cao, Charles and Chen, Yong and Goetzmann, William N. and Liang, Bing, The Role of Hedge Funds in the Security Price Formation Process (August 25, 2013). Available at SSRN: http://ssrn.com/abstract=2121495 or http://dx.doi.org/10.2139/ssrn.2121495

Contact Information

Charles Cao
Pennsylvania State University ( email )
Department of Finance
Smeal College of Business
University Park, PA 16802
United States
814-865-7891 (Phone)
814-865-3362 (Fax)
HOME PAGE: http://www.personal.psu.edu/qxc2/cao.html
Yong Chen
Texas A&M University (TAMU) - Department of Finance ( email )
360 Wehner Building
College Station, TX 77843-4218
United States
HOME PAGE: http://people.tamu.edu/~ychen

William N. Goetzmann
Yale School of Management - International Center for Finance ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5950 (Phone)
203-432-8931 (Fax)
HOME PAGE: http://viking.som.yale.edu

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Bing Liang (Contact Author)
University of Massachusetts at Amherst - Department of Finance & Operations Management ( email )
Amherst, MA 01003
United States
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030
China

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