Capital Market Efficiency and Arbitrage Efficacy

55 Pages Posted: 15 Mar 2012 Last revised: 20 Mar 2015

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: May 13, 2014

Abstract

Efficiency in the capital markets requires that capital flows are sufficient to arbitrage anomalies away. We examine the relationship between flows to a "quant" strategy that is based on capital market anomalies, and the subsequent performance of this strategy. When these flows are high, quant funds are able to implement arbitrage strategies more effectively, which, in turn, leads to lower profitability of market anomalies in the future, and vice versa. Thus, the degree of cross-sectional equity market efficiency varies across time with the availability of arbitrage capital.

Keywords: cross-section of stock returns; limits to arbitrage; market efficiency; anomalies; funding constraints; fund flows; mutual funds

JEL Classification: G14

Suggested Citation

Akbas, Ferhat and Armstrong, Will J. and Sorescu, Sorin M. and Subrahmanyam, Avanidhar, Capital Market Efficiency and Arbitrage Efficacy (May 13, 2014). AFA 2013 San Diego Meetings Paper; Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2022485 or http://dx.doi.org/10.2139/ssrn.2022485

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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