Limits to Arbitrage: Time-Varying Market Neutrality of Hedge Funds

21 Pages Posted: 11 Sep 2009

See all articles by Arjen Siegmann

Arjen Siegmann

Vrije Universiteit Amsterdam, School of Business and Economics

Denitsa Stefanova

Universite du Luxembourg

Date Written: August 18, 2009

Abstract

Little is known about the exact sources and risks of hedge fund’s market neutral strategies. Based on existing views on arbitrage trading, such as done by hedge funds, we formulate and test a hypothesis that market neutrality is affected by market-wide liquidity. We find that such is the case for equity-oriented hedge fund indices as well as portfolios sorted on stock market beta. Also, liquidity has a higher impact on neutrality in a smaller market such as the S&P MidCap and SmallCap. Contrary to our expectations, the relation between liquidity and market neutrality is stronger for portfolios with higher beta.

Keywords: hedge funds, market neutrality, liquidity

JEL Classification: G12, G2

Suggested Citation

Siegmann, Arjen and Stefanova, Denitsa, Limits to Arbitrage: Time-Varying Market Neutrality of Hedge Funds (August 18, 2009). Available at SSRN: https://ssrn.com/abstract=1471322 or http://dx.doi.org/10.2139/ssrn.1471322

Arjen Siegmann (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, NOT IN US OR CANADA 1081 HV
Netherlands

HOME PAGE: http://https://research.vu.nl/en/persons/arjen-siegmann

Denitsa Stefanova

Universite du Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

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