Fast and Slow Arbitrage: Fund Flows and Mispricing in the Frequency Domain

94 Pages Posted: 12 Sep 2020

See all articles by Xi Dong

Xi Dong

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Namho Kang

Bentley University - Department of Finance

Joel Peress

INSEAD - Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 2020

Abstract

Using spectral analysis, we document that hedge fund and mutual fund flows explain much of the persistence and cyclicality of anomaly returns. Indeed, they correct and amplify mispricing slowly, 24 and 4 times more, respectively, over horizons longer than one year compared with shorter horizons . Passive fund flows, in contrast, have no effect on mispricing. Over long horizons, hedge fund flows are most influential among fund types on a per-dollar basis . Hedge fund managers, rather than investors, helm this "slow-moving" effect, and frictions explain their behavior. We propose a model highlighting the horizon-dependent effects of capital on market efficiency.

Keywords: Hedge Funds, Limits to Arbitrage, Market Efficiency, Mutual funds, pricing anomalies, return persistence and cyclicality/seasonality, Slow-moving capital, Spectral analysis, transaction costs

Suggested Citation

Dong, Xi and Kang, Namho and Peress, Joel, Fast and Slow Arbitrage: Fund Flows and Mispricing in the Frequency Domain (August 2020). Available at SSRN: https://ssrn.com/abstract=3688189

Xi Dong (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

One Bernard Baruch Way, Box B10-225
New York City, NY 10010
United States

HOME PAGE: http://faculty.baruch.cuny.edu/xdong1/

Namho Kang

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States

Joel Peress

INSEAD - Finance ( email )

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F-77305 Fontainebleau Cedex
France
+33 1 60 72 40 00 (Phone)
+33 1 60 72 40 45 (Fax)

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