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Asset Pricing: Frictions and Market Efficiency

Paper Session

Sunday, Jan. 5, 2020 10:15 AM - 12:15 PM (PDT)

Manchester Grand Hyatt, Seaport DE
Hosted By: American Finance Association
  • Chair: Joseph Engelberg, University of California-San Diego

Slow Arbitrage: Fund Flows and Mispricing in the Frequency Domain

Xi Dong
,
City University of New York-Baruch College
Namho Kang
,
Bentley University
Joel Peress
,
INSEAD

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 highlights the frequency-dependent effects of (especially arbitrage) capital on market efficiency.

Labor Links and Shock Transmissions

Yukun Liu
,
University of Rochester
Xi Wu
,
New York University

Abstract

We construct a time-varying network of labor market competitors for all public companies in the United States using the near-universe of online job postings. We show that the labor network is important in transmitting both labor and industry shocks. There are three main findings in this paper. First, we find that the overlap between a firm's labor market competitors and its product market rivals is less than 20 percent, suggesting that firms can face vastly different labor market and industry competitors. Second, firm returns strongly respond to both the contemporaneous and lagged labor market shocks proxied by returns of the labor competitors. A long-short strategy exploiting the lagged response generates an average annualized excess return of 9.36 percent. We refer to this return predictability as "labor momentum". We find that the "labor momentum" effect is stronger among small firms, firms with low analyst coverage, and firms with low institutional ownership. The results are consistent with the idea that investors fail to fully incorporate information about the labor market, leading to predictable returns. Third, shocks to an industry can affect firms outside the industry through the labor network. We show that following the financial crisis, the non-financial firms that are close to the financial sector in the labor market network upskill more and have better financial performance, compared to the firms that are far away.

Ubiquitous Comovement

William Grieser
,
Texas Christian University
Junghoon Lee
,
Tulane University
Morad Zekhnini
,
Tulane University

Abstract

Rational and behavioral asset pricing theories offer conflicting interpretations of the covariance structure of asset returns. Return comovement beyond what prespecified empirical factor models can explain is often interpreted in favor of frictions or behavioral explanations. However, we show that randomly grouped assets exhibit ``excess'' comovement that is ubiquitous and indistinguishable from the comovement of economically motivated groupings advanced in the literature. Our finding is consistent with the presence of a latent factor that could be derived from multiple sources of systematic variation, including rational sources. We propose new statistical tests that account for latent factors when detecting excess comovement.
Discussant(s)
Dong Lou
,
London School of Economics
Isaac Hacamo
,
Indiana University
Charles Clarke
,
University of Kentucky
JEL Classifications
  • G1 - General Financial Markets