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Hedge Fund Holdings and Stock Market Efficiency

61 Pages Posted: 25 May 2014  

Charles Cao

Pennsylvania State University

Bing Liang

University of Massachusetts Amherst - Department of Finance

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Lubomir Petrasek

Federal Reserve Board

Multiple version iconThere are 2 versions of this paper

Date Written: May 12, 2014

Abstract

We examine the relation between changes in hedge fund stock holdings and measures of informational efficiency of equity prices derived from transactions data, and find that, on average, increased hedge fund ownership leads to significant improvements in the informational efficiency of equity prices. The contribution of hedge funds to price efficiency is greater than the contributions of other types of institutional investors, such as mutual funds or banks. However, stocks held by hedge funds experienced extreme declines in price efficiency during liquidity crises, most notably in the last quarter of 2008, and the declines were most severe in stocks held by hedge funds connected to Lehman Brothers and hedge funds using leverage.

Keywords: Hedge funds, institutional investors, market efficiency

JEL Classification: G14, G23

Suggested Citation

Cao, Charles and Liang, Bing and Lo, Andrew W. and Petrasek, Lubomir, Hedge Fund Holdings and Stock Market Efficiency (May 12, 2014). FEDS Working Paper No. 2014-36. Available at SSRN: https://ssrn.com/abstract=2439816 or http://dx.doi.org/10.2139/ssrn.2439816

Charles Cao

Pennsylvania State University ( email )

Department of Finance
Smeal College of Business
University Park, PA 16802
United States
814-865-7891 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://www.personal.psu.edu/qxc2/cao.html

Bing Liang

University of Massachusetts Amherst - Department of Finance ( email )

Amherst, MA 01003
United States

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Stata Center
Cambridge, MA 02142
United States

Lubomir Petrasek (Contact Author)

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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