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Fast and Slow Arbitrage: Smart Money, Dumb Money and Mispricing in the Frequency Domain

  • 2019.07.10
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Speaker: Dr. Xi Dong (Baruch College, City University of New York)

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)

Venue:

??Room 619, Teaching A

Speaker:

?Dr. Xi Dong?(Baruch College,?City University of New York)

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.

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