Review of Asset Pricing Studies (RAPS), Forthcoming
65 Pages Posted: 14 Jun 2016 Last revised: 20 Apr 2017
Date Written: March 20, 2017
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: 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