Working Paper: CEPR ID: DP15235
Authors: Jol Peress; Xi Dong; Namho Kang
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: pricing anomalies; market efficiency; return persistence; cyclicality; seasonality; mutual funds; hedge funds; slow-moving capital; transaction costs; limits to arbitrage; spectral analysis
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Hedge fund flows (G23) | Anomaly return (Y60) |
| Mutual fund flows (G23) | Anomaly return (Y60) |
| Hedge fund flows (G23) | Mispricing correction (G19) |
| Mutual fund flows (G23) | Mispricing exacerbation (E31) |
| Hedge fund flows (G23) | Mispricing (G19) |
| Mutual fund flows (G23) | Mispricing (G19) |