Hedge fund holdings and stock market efficiency

Charles Cao, Bing Liang, Andrew W. Lo, Lubomir Petrasek

Research output: Contribution to journalReview articlepeer-review

17 Scopus citations

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 stocks that are relatively inefficiently priced, and the price efficiency of these stocks improves after hedge funds increase their holdings. Hedge fund ownership contributes more to efficient pricing than ownership by other types of institutional investors. However, stocks held by hedge funds experienced large declines in price efficiency during several liquidity crises.

Original languageEnglish (US)
Pages (from-to)77-116
Number of pages40
JournalReview of Asset Pricing Studies
Volume8
Issue number1
DOIs
StatePublished - Jun 1 2018

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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