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Hedge fund holdings and stock market efficiency

Listed author(s):
  • Cao, Charles

    ()

    (Smeal College of Business, Penn State University)

  • Liang, Bing

    ()

    (Isenberg School of Management, University of Massachusetts)

  • Lo, Andrew W.

    ()

    (MIT Sloan School of Management)

  • Petrasek, Lubomir

    ()

    (Board of Governors of the Federal Reserve System (U.S.))

We examine the relation between changes in hedge fund stock holdings and measures of informational efficiency of equity prices derived from transactions data, and find that, on average, increased hedge fund ownership leads to significant improvements in the informational efficiency of equity prices. The contribution of hedge funds to price efficiency is greater than the contributions of other types of institutional investors, such as mutual funds or banks. However, stocks held by hedge funds experienced extreme declines in price efficiency during liquidity crises, most notably in the last quarter of 2008, and the declines were most severe in stocks held by hedge funds connected to Lehman Brothers and hedge funds using leverage.

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File URL: http://www.federalreserve.gov/pubs/feds/2014/201436/201436pap.pdf
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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2014-36.

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Length: 61 pages
Date of creation: 14 May 2014
Handle: RePEc:fip:fedgfe:2014-36
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