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Hedge Fund Holdings and Stock Market Efficiency

Review of Asset Pricing Studies (RAPS), Forthcoming

65 Pages Posted: 14 Jun 2016 Last revised: 20 Apr 2017

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: March 20, 2017

Abstract

We study the relation between hedge fund equity holdings and measures of informational efficiency of stock prices derived from intraday transactions, as well as daily data. Our findings support the role of hedge funds as arbitrageurs who reduce mispricing in the market. Hedge funds invest in relatively inefficiently priced stocks, and the price efficiency of these stocks improves after hedge funds increase their holdings. Hedge fund ownership contributes more to efficient pricing than does ownership by other types of institutional investors. However, stocks held by hedge funds experienced large declines in price efficiency during several liquidity crises.

Keywords: hedge funds, institutional investors, equity holdings, market efficiency, liquidity crises

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 (March 20, 2017). Review of Asset Pricing Studies (RAPS), Forthcoming . Available at SSRN: https://ssrn.com/abstract=2793513 or http://dx.doi.org/10.2139/ssrn.2793513

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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