Discussion Paper Details

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Title: Who Trades Against Mispricing?

Author(s): Mariassunta Giannetti and Bige Kahraman

Publication Date: March 2016

Keyword(s): Capital Structure, Flow performance Sensitivity, Limits to Arbitrage and Market Efficiency

Programme Area(s): Financial Economics

Abstract: We provide evidence that open-end structures undermine asset managers' incentives to attack long-term mispricing. First, we compare open-end funds with closed-end funds. Closed-end funds purchase more underpriced stocks than open-end funds, especially if the stocks involve high arbitrage risk. We then show that hedge funds with high share restrictions, having a lower degree of open-ending, also trade against long-term mispricing to a larger extent than other hedge funds. Our analysis suggests that open-end organizational structures are an impediment to arbitrage.

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Bibliographic Reference

Giannetti, M and Kahraman, B. 2016. 'Who Trades Against Mispricing?'. London, Centre for Economic Policy Research.