Opaque Trading, Disclosure and Asset Prices: Implications for Hedge Fund Regulation
Review of Financial Studies, 2014, 27(4): 1190-1237
60 Pages Posted: 17 Oct 2011 Last revised: 26 Feb 2016
Date Written: November 1, 2012
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.
Keywords: Opaque trading, asset prices, welfare, regulation
JEL Classification: G14, G12, G11, D82
Suggested Citation: Suggested Citation