Arbitrage Trading: The Long and the Short of It
54 Pages
Posted: 20 Feb 2015
Last revised: 13 Nov 2015
Texas A&M University - Department of Finance
University of Notre Dame - Mendoza College of Business
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:
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
