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Arbitrage Trading: The Long and the Short of It

54 Pages Posted: 20 Feb 2015 Last revised: 13 Nov 2015

Yong Chen

Texas A&M University - Department of Finance

Zhi Da

University of Notre Dame - Mendoza College of Business

Dayong Huang

University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics

Date Written: November 12, 2015

Abstract

We measure net arbitrage trading by the difference between abnormal hedge fund equity holdings and abnormal short interest on a stock. In the cross section, net arbitrage trading strongly predicts future stock returns. This predictability is not due to temporary price pressure, cannot be produced using total institutional holdings, but is consistent with information advantage and copycat trading. When examining a broad set of return anomalies, we find anomaly returns to come exclusively from the anomaly stocks traded by arbitrageurs, and such stocks are on average harder to arbitrage. Overall, our findings confirm that arbitrage trading is informative about mispricing.

Keywords: Arbitrage trading, hedge fund holdings, short interest, stock return anomalies, limits to arbitrage

JEL Classification: G11, G23

Suggested Citation

Chen, Yong and Da, Zhi and Huang, Dayong, Arbitrage Trading: The Long and the Short of It (November 12, 2015). Available at SSRN: https://ssrn.com/abstract=2566802 or http://dx.doi.org/10.2139/ssrn.2566802

Yong Chen (Contact Author)

Texas A&M University - Department of Finance ( email )

360 Wehner Building
College Station, TX 77843-4218
United States

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Dayong Huang

University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics ( email )

401 Bryan Building
Greensboro, NC 27402-6179
United States

HOME PAGE: http://sites.google.com/a/uncg.edu/dayong-huang/

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