Funding Constraints and Market Efficiency

51 Pages Posted: 30 Nov 2010 Last revised: 23 Oct 2012

See all articles by Ferhat Akbas

Ferhat Akbas

University of Illinois at Chicago

Will J. Armstrong

Texas Tech University - Area of Finance

Sorin M. Sorescu

Texas A&M University - Department of Finance

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Date Written: June 12, 2011

Abstract

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.

Keywords: market efficiency, anomalies, arbitrage, funding constraints, momentum, reversal, value, profitability

JEL Classification: G12, G14

Suggested Citation

Akbas, Ferhat and Armstrong, Will J. and Sorescu, Sorin M. and Subrahmanyam, Avanidhar, Funding Constraints and Market Efficiency (June 12, 2011). Mays Business School Research Paper No. 2012-75. Available at SSRN: https://ssrn.com/abstract=1717233 or http://dx.doi.org/10.2139/ssrn.1717233

Ferhat Akbas

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60076
United States

Will J. Armstrong

Texas Tech University - Area of Finance ( email )

Lubbock, TX 79409
United States

Sorin M. Sorescu (Contact Author)

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States
979-458-0380 (Phone)

HOME PAGE: http://wehner.tamu.edu/finc.www/ssorescu/

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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