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

60 Pages Posted: 17 Oct 2011 Last revised: 26 Feb 2016

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

Date Written: November 1, 2012

Abstract

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

Easley, David and 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; 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. Available at SSRN: https://ssrn.com/abstract=1945347 or http://dx.doi.org/10.2139/ssrn.1945347

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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