Arbitrage Involvement and Security Prices

Management Science, Forthcoming

45 Pages Posted: 25 Feb 2013 Last revised: 3 Aug 2017

See all articles by Byoung-Hyoun Hwang

Byoung-Hyoun Hwang

Cornell University - Dyson School of Applied Economics and Management; Korea University - Department of Finance

Baixiao Liu

Florida State University

Wei Xu

HSBC School of Business, Peking University; Purdue University

Date Written: August 2, 2017

Abstract

We argue that hedge funds more aggressively buy underpriced stocks when they can short and, as such, protect their stock purchases from industry fluctuations. We utilize the institutional feature in Hong Kong in virtue of which only stocks added to a special list can be shorted. Our first-stage analysis uses hedge fund holdings data and provides evidence that the emergency of shortable securities, indeed, causes hedge funds to more aggressively buy seemingly underpriced stocks. Our second-stage analysis presents evidence that hedge funds’ increased involvement in these stocks helps correct under-pricing and moves prices in the direction of fundamentals.

Keywords: Hedge Funds, Short-Selling, Market Efficiency

JEL Classification: G11, G12, G14

Suggested Citation

Hwang, Byoung-Hyoun and Liu, Baixiao and Xu, Wei, Arbitrage Involvement and Security Prices (August 2, 2017). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2223474 or http://dx.doi.org/10.2139/ssrn.2223474

Byoung-Hyoun Hwang (Contact Author)

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

HOME PAGE: http://www.bhwang.com

Korea University - Department of Finance

Seoul, 136-701
United States

Baixiao Liu

Florida State University ( email )

Tallahasse, FL 32306
United States

Wei Xu

HSBC School of Business, Peking University ( email )

China

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
196
Abstract Views
1,287
rank
152,652
PlumX Metrics