Publicizing Private Information

How does greater public disclosure of arbitrage activity and informed trading affect price efficiency? To answer this, we exploit rule amendments in U.S. securities markets, which increased the frequency of public disclosure of short positions. Higher public disclosure can hurt the production of information and deteriorate efficiency, or it can be beneficial by helping short-sellers diffuse their information faster. With more frequent disclosure, information encapsulated within short interest is incorporated into prices faster, improving price efficiency. Furthermore, we find important reductions in short-sellers’ horizon risk, and increases in short-sales with the rule amendments

Systematic liquidity and leverage

Does trader leverage exacerbate the liquidity comovement that we observe during crises? Using a regression discontinuity design, we exploit threshold rules governing margin eligibility in India to analyze the impact of trader leverage on systematic liquidity. We find that trader leverage causes sharp increases in comovement during severe market downturns, explaining about one third of the increase in liquidity commonality during these periods. Consistent with downward price pressure due to deleveraging, we also find that trader leverage causes stocks to exhibit large increases in return comovement during these periods of market stress.that leverage causes stocks to exhibit large increases in return comovement during crises

Trader leverage and liquidity

Does trader leverage drive equity market liquidity? We use the unique features of the margin trading system in India to identify a causal relationship between traders’ ability to borrow and a stock’s market liquidity. To quantify the impact of trader leverage, we employ a regression discontinuity design that exploits threshold rules that determine a stock’s margin trading eligibility. We find that liquidity is higher when stocks become eligible for margin trading and that this liquidity enhancement is driven by margin traders’ contrarian strategies. Consistent with downward liquidity spirals due to deleveraging, we also find that this effect reverses during crises

Who Trades Against Mispricing?

We provide evidence that redemption risk undermines managerial incentives to trade against mispricing. We start by comparing open-end funds with closed-end funds, which are similarly regulated, but not subject to redemptions. Compared to open-end funds, closed-end funds purchase more underpriced stocks, especially if these involve high arbitrage risk. We then extend the analysis to prototypical "rational arbitrageurs", hedge funds. Hedge funds with higher share restrictions are also more likely to trade against mispricing than other hedge funds. Thus, organizational structures involving less redemption risk appear to better serve the social function of bringing prices to their fundamental values

Open-End Organizational Structures and Limits to Arbitrage

We provide evidence that open-end organizational structures undermine incentives for asset managers to attack long-term mispricing. We compare open-end funds with closed-end funds. Closed-end funds purchase more underpriced stocks than do open-end funds, especially if the stocks involve high arbitrage risk. We then show that hedge funds with highshare restrictions having a lower degree of open-endedness also trade against long-term mispricing to a larger extentthan do other hedge funds. Our analysis suggests that open-end organizational structures are not conducive to long-term risky arbitrage

Learning About Mutual Fund Managers

We study capital allocations to managers with two mutual funds, and show that investors learn about managers from their performance records. Flows into a fund are predicted by the manager's performance in his other fund, especially when he outperforms and when signals from the other fund are more useful. In equilibrium, capital should be allocated such that there is no cross-fund predictability. However, we find positive predictability, particularly among underperforming funds. Our results indicate incomplete learning: while investors move capital in the right direction, they do not withdraw enough capital when the manager underperforms in his other fund