Fast and Slow Arbitrage: Smart Money, Dumb Money and Mispricing in the Frequency Domain
Speaker: Dr. Xi Dong (Baruch College, City University of New York)
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Topic: |
Fast and Slow Arbitrage: Smart Money, Dumb Money and Mispricing in the Frequency Domain |
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Time&Date: |
15:00-16:15 pm, 2019/7/15 (Monday) |
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Venue: |
Room 619, Teaching A |
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Speaker: |
Dr. Xi Dong (Baruch College, City University of New York) |
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| Abstract: | We conduct a spectral analysis of the relation between capital flows and mispricing. Hedge funds (smart money) and mutual funds (dumb money) both behave as low-pass filters, deploying high-frequency flows towards low-frequency mispricing in opposite directions. But hedge funds attenuate high-frequency flows more than mutual funds do, thus improving market efficiency 2 to 7 times more slowly than mutual funds worsen it. Time-series and cross-sectional tests indicate that limited access to capital and implementation costs are the reason hedge funds behave as low-pass filters. Our results highlight the markedly different influences of smart and dumb capital on market efficiency in the frequency domain. |
