Accounting and Finance Seminar - Joel Peress (INSEAD)

4 December 2019, 1.00 PM - 4 December 2019, 2.15 PM

Joel Peress

G.15, 15-19 Tyndalls Park Road

Slow Arbitrage: Fund Flows and Mispricing in the Frequency Domain

Abstract 

We conduct a spectral analysis of the relation between fund flows and mispricing. Hedge funds and mutual funds both behave as low-pass filters, deploying high-frequency flows toward low-frequency mispricing. But hedge funds attenuate high-frequency flows more than do mutual funds, thus improving market efficiency 2 to 7 times more slowly than mutual funds worsen efficiency. Time-series and cross-sectional tests indicate that risk, limited access to capital, and implementation costs explain why hedge funds behave as low-pass filters. We propose a model to rationalize these results, which highlight the frequencydependent effects of (especially arbitrage) capital on market efficiency.

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