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Why Are Most Funds Open-End? Competition and the Limits of Arbitrage

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Listed author(s):
  • Jeremy C. Stein

Abstract

The majority of asset-management intermediaries (e.g., mutual funds, hedge funds) are structured on an open-end basis, even though it appears that the open-end form can be a serious impediment to arbitrage. I argue that the equilibrium degree of open-ending in an economy can be excessive from the point of view of investors. When funds compete for investors' dollars, they may engage in a counterproductive race towards the open-end form, even though this form leaves them ill-suited to undertaking certain types of arbitrage trades. One implication of the analysis is that, even absent short-sales constraints or other frictions, economically large mispricings can coexist with rational, competitive arbitrageurs who earn small excess returns.

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File URL: http://www.nber.org/papers/w10259.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10259.

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Date of creation: Feb 2004
Publication status: published as Stein, Jeremy C. "Why Are Most Funds Open-end? Competition And The Limits Of Arbitrage," Quarterly Journal of Economics, 2005, v120(1,Feb), 247-272.
Handle: RePEc:nbr:nberwo:10259
Note: CF AP
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Find related papers by JEL classification:

  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • G20 - Financial Economics - - Financial Institutions and Services - - - General

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Reforming mutual funds: a proposal to improve financial market resilience
    by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2016-09-19 12:46:34
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Cited by:

  1. Christopher J. Neely & Paul A. Weller, 2007. "Central bank intervention with limited arbitrage," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 249-260.
  2. Bradley Jones, 2015. "Asset Bubbles; Re-thinking Policy for the Age of Asset Management," IMF Working Papers 15/27, International Monetary Fund.

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