Matti Suominen's article was accepted to the Management Science
Article "Hedge Funds and Stock Market Efficiency" by Joni Kokkonen (Catolica) and Matti Suominen has been accepted for publication in the Management Science.
Abstract:
We measure misvaluation using the discounted residual income model. As shown in the literature, this measure of stocks’ misvaluation significantly explains their future cross-sectional returns. We measure the market level misvaluation (market inefficiency) by the misvaluation spread: the difference in the misvaluation of the most over- and undervalued shares. We show that the misvaluation spread is a strong predictor of a misvaluation based long-short portfolio’s returns, reinforcing the hypothesis that it proxies for the level of mispricing in the stock market. Using data on hedge fund returns, hedge fund industry AUM, flows, and individual hedge fund holdings, we present evidence that hedge funds’ trading reduces market level misvaluation. Our results are robust across different time periods and are not driven by market liquidity. Moreover, we find that mutual funds do not have a similar, price-correcting effect as hedge funds.
Paper can be downloaded at SSRN:
Read more news
Research Council of Finland establishes a Center of Excellence in Quantum Materials
The Centre, called QMAT, creates new materials to power the quantum technology of coming decades.
Major funding powers development of next-generation machine technology aimed at productivity leap in export sectors
The BEST research project is developing new types of sealing, bearing, and damping technology.
The TAIMI project builds an equal working life – a six-year consortium project seeks solutions to recruitment and skill challenges
Artificial intelligence (AI) is changing skill requirements, the population is aging, and the labor shortage is deepening. Meanwhile, the potential of international experts often remains unused in Finland. These challenges in working life are addressed by the six-year TAIMI project funded by the Strategic Research Council, and implemented by a broad consortium.