The Growth and Limits of Arbitrage: Evidence from Short Interest

By S. G. Hanson, Adi Sunderam. 2014

144 citations recorded by the source corpus.

We develop a novel methodology to infer the amount of capital allocated to quantitative equity arbitrage strategies. Using this methodology, which exploits time-variation in the cross-section of short interest, we document that the amount of capital devoted to value and momentum strategies has grown significantly since the late 1980s. We provide evidence that this increase in capital has resulted in lower strategy returns. However, consistent with theories of limited arbitrage, we show that strategy-level capital flows are influenced by past strategy returns and strategy return volatility and that arbitrage capital is most limited during times when strategies perform best. This suggests that the growth of arbitrage capital may not completely eliminate returns to these strategies.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/a48ad2e47858ed768f5c81f45daa020bce1c92bf

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

In Finance

Citations in the corpus

Does Academic Research Destroy Stock Return Predictability (2016, background): “We cannot reject the null that the slopes are equal in dollar volume and turnover regressions.”
Political Sentiment and Predictable Returns (2016, methodology): “To control for previously documented determinants of short interest (e.g., Hanson and Sunderam (2014)), we include controls for institutional ownership, three-month turnover, twelvemonth return volatility, and a dummy variable indicating whether a firm has convertibles securities outstanding.”