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Arbitrage Trading: The Long and the Short of It

75 Pages Posted: 20 Feb 2015 Last revised: 15 Jan 2018

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: January 12, 2018

Abstract

We examine net arbitrage trading (NAT) measured by the difference between quarterly abnormal hedge fund holdings and abnormal short interest. NAT strongly predicts stock returns in the cross section. Across a broad set of stock anomalies, abnormal returns are realized only among stocks experiencing strong NAT. Consistent with the existence of limits-to-arbitrage, NAT does not correct mispricing completely and instantaneously. Exploiting the Regulation SHO that facilitated short selling for a random set of stocks, we present causal evidence that limits-to-arbitrage affect NAT’s ability to correct mispricing. We also confirm these findings using daily data.

Keywords: Arbitrage trading, hedge fund holdings, short interest, stock anomaly, 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 (January 12, 2018). 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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