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  • 2014
  • Article
  • Review of Financial Studies

The Growth and Limits of Arbitrage: Evidence from Short Interest

By: Samuel G. Hanson and Adi Sunderam
  • Format:Print
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Abstract

We develop a novel methodology to infer the amount of capital allocated to quantitative equity arbitrage strategies. Using this methodology, which exploits time-variation in the cross section of short interest, we document that the amount of capital devoted to value and momentum strategies has grown significantly since the late 1980s. We provide evidence that this increase in capital has resulted in lower strategy returns. However, consistent with theories of limited arbitrage, we show that strategy-level capital flows are influenced by past strategy returns as well as strategy return volatility, and that arbitrage capital is most limited during times when strategies perform best. This suggests that the growth of arbitrage capital may not completely eliminate returns to these strategies.

Keywords

Strategy; Financial Instruments; Capital Markets; Investment

Citation

Hanson, Samuel G., and Adi Sunderam. "The Growth and Limits of Arbitrage: Evidence from Short Interest." Review of Financial Studies 27, no. 4 (April 2014): 1238–1286. (Winner of the RFS Rising Scholar Prize 2014. Internet Appendix Here.)
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About The Authors

Samuel G. Hanson

Finance
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Adi Sunderam

Finance
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More from the Authors

    • 2022
    • Faculty Research

    Demand-and-Supply Imbalance Risk and Long-Term Swap Spreads

    By: Samuel G. Hanson, Aytek Malkhozov and Gyuri Venter
    • 2022
    • Faculty Research

    Shared Models in Networks, Organizations, and Groups

    By: Joshua Schwartzstein and Adi Sunderam
    • 2022
    • Faculty Research

    Segmented Arbitrage

    By: Emil Siriwardane, Adi Sunderam and Jonathan L. Wallen
More from the Authors
  • Demand-and-Supply Imbalance Risk and Long-Term Swap Spreads By: Samuel G. Hanson, Aytek Malkhozov and Gyuri Venter
  • Shared Models in Networks, Organizations, and Groups By: Joshua Schwartzstein and Adi Sunderam
  • Segmented Arbitrage By: Emil Siriwardane, Adi Sunderam and Jonathan L. Wallen
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