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Open-End Organizational Structures and Limits to Arbitrage

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  • Mariassunta Giannetti
  • Bige Kahraman

Abstract

We provide evidence that open-end organizational structures undermine incentives for asset managers to attack long-term mispricing. We compare open-end funds with closed-end funds. Closed-end funds purchase more underpriced stocks than do open-end funds, especially if the stocks involve high arbitrage risk. We then show that hedge funds with highshare restrictions having a lower degree of open-endedness also trade against long-term mispricing to a larger extentthan do other hedge funds. Our analysis suggests that open-end organizational structures are not conducive to long-term risky arbitrage. Received November 4, 2015; editorial decision March 10, 2017 by Editor Andrew Karolyi.

Suggested Citation

  • Mariassunta Giannetti & Bige Kahraman, 2018. "Open-End Organizational Structures and Limits to Arbitrage," The Review of Financial Studies, Society for Financial Studies, vol. 31(2), pages 773-810.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:2:p:773-810.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx057
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    Cited by:

    1. Jagannathan, Ravi & Pelizzon, Loriana & Schaumburg, Ernst & Sherman, Mila Getmansky & Yuferova, Darya, 2022. "Recovery from fast crashes: Role of mutual funds," Journal of Financial Markets, Elsevier, vol. 59(PB).
    2. Antonio Gargano & Juan Sotes-Paladino & Patrick Verwijmeren, 2022. "Out of Sync: Dispersed Short Selling and the Correction of Mispricing," Working Papers 108, Red Nacional de Investigadores en Economía (RedNIE).
    3. Li, Li & Huang, Shiyang & Lou, Dong & Shi, Jiahong, 2021. "Why don't most mutual funds short sell?," LSE Research Online Documents on Economics 118854, London School of Economics and Political Science, LSE Library.
    4. Jonathan Fletcher, 2022. "Exploring the diversification benefits of US international equity closed-end funds," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(3), pages 297-320, September.
    5. Nina Boyarchenko & Thomas M. Eisenbach & Pooja Gupta & Or Shachar & Peter Van Tassel, 2018. "Bank-intermediated arbitrage," Staff Reports 858, Federal Reserve Bank of New York.
    6. Ignashkina, Anna & Rinne, Kalle & Suominen, Matti, 2022. "Short-term reversals, returns to liquidity provision and the costs of immediacy," Journal of Banking & Finance, Elsevier, vol. 138(C).
    7. Timmer, Yannick, 2018. "Cyclical investment behavior across financial institutions," Journal of Financial Economics, Elsevier, vol. 129(2), pages 268-286.

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