Market Efficiency and Hedge Fund Trading Strategies

40 Pages Posted: 2 Jun 2016

See all articles by Marie Lambert

Marie Lambert

University of Liege - HEC Management School

Nicolas A. Papageorgiou

HEC Montreal - Department of Finance

Federico Platania

University of Liege; Ecole Superieure d'Ingenierie Leonard de Vinci (ESILV); Ecole de Management Léonard De Vinci

Date Written: May 30, 2016

Abstract

Stock and option markets can at times reflect differing information. We identify three reasons for the presence of these periods of ’disagreement’ between the cash and derivatives markets: 1) high volatility and noise trading; 2) high level of risk aversion; 3) speculation versus hedging trades. This paper investigates the role that hedge funds, a proxy for sophisticated investors, play in the price discovery process between stock and option markets and the disagreement/agreement periods. We observe that a disparity in information between the two markets is often associated with deleveraging in directional exposures and reversal strategies. Posterior to the event, active tactical asset allocation in small and value factor investing takes place. We investigate four specific macro events which resulted in significant rebalancing by hedge fund manegers: the Thai Baht depreciation, the Dot-com bubble, the credit crunch and the Nasdaq correction.

Keywords: hedge funds, price discovery, options, informed trading, asset management

JEL Classification: G11, G13

Suggested Citation

Lambert, Marie and Papageorgiou, Nicolas A. and Platania, Federico, Market Efficiency and Hedge Fund Trading Strategies (May 30, 2016). Available at SSRN: https://ssrn.com/abstract=2787954 or http://dx.doi.org/10.2139/ssrn.2787954

Marie Lambert

University of Liege - HEC Management School ( email )

HEC-Liège
rue Louvrex 14
LIEGE, Liege 4000
Belgium

Nicolas A. Papageorgiou (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Federico Platania

University of Liege ( email )

B-4000 Liege
Belgium

Ecole Superieure d'Ingenierie Leonard de Vinci (ESILV) ( email )

92916 Paris La Defense Cedex
France

Ecole de Management Léonard De Vinci ( email )

Paris

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