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Opaque Trading, Disclosure, and Asset Prices: Implications for Hedge Fund Regulation

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  • David Easley
  • Maureen O'Hara
  • Liyan Yang

Abstract

We investigate the effect of ambiguity about hedge fund investment strategies on asset prices and aggregate welfare. We model some traders (mutual funds) as facing ambiguity about the equilibrium trading strategies of other traders (hedge funds). This ambiguity limits the ability of mutual funds to infer information from prices and has negative effects on market outcomes. We use this analysis to investigate the implications of regulations that affect disclosure requirements of hedge funds or the cost of operating a hedge fund. Our analysis demonstrates how regulations affect asset prices and welfare through their influence on opaque trading.

Suggested Citation

  • David Easley & Maureen O'Hara & Liyan Yang, 2014. "Opaque Trading, Disclosure, and Asset Prices: Implications for Hedge Fund Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 1190-1237.
    • Handle: RePEc:oup:rfinst:v:27:y:2014:i:4:p:1190-1237.
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    File URL: http://hdl.handle.net/10.1093/rfs/hht079
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    Citations

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    Cited by:

    1. Huang, Helen Hui & Zhang, Shunming & Zhu, Wei, 2017. "Limited participation under ambiguity of correlation," Journal of Financial Markets, Elsevier, vol. 32(C), pages 97-143.
    2. Hussinger, Katrin & Pacher, Sebastian, 2019. "Information ambiguity, patents and the market value of innovative assets," Research Policy, Elsevier, vol. 48(3), pages 665-675.
    3. Jan Schneemeier, 2019. "Shock Propagation Through Cross-Learning in Opaque Networks," 2019 Meeting Papers 329, Society for Economic Dynamics.
    4. Han, Bing & Tang, Ya & Yang, Liyan, 2016. "Public information and uninformed trading: Implications for market liquidity and price efficiency," Journal of Economic Theory, Elsevier, vol. 163(C), pages 604-643.
    5. Takayuki Ogawa & Jun Sakamoto, 2021. "Welfare implications of mitigating investment uncertainty," Annals of Finance, Springer, vol. 17(4), pages 559-582, December.
    6. Jank, Stephan & Roling, Christoph & Smajlbegovic, Esad, 2021. "Flying under the radar: The effects of short-sale disclosure rules on investor behavior and stock prices," Journal of Financial Economics, Elsevier, vol. 139(1), pages 209-233.
    7. Junyong He & Helen Hui Huang & Shunming Zhang, 2020. "Ambiguity Aversion, Information Acquisition, and Market Opacity," Annals of Economics and Finance, Society for AEF, vol. 21(2), pages 263-329, November.
    8. Shaowei Ke & Qi Zhang, 2020. "Randomization and Ambiguity Aversion," Econometrica, Econometric Society, vol. 88(3), pages 1159-1195, May.
    9. Kahraman, Bige & Pachare, Salil, 2018. "Show us your shorts!," CEPR Discussion Papers 12658, C.E.P.R. Discussion Papers.
    10. Luisito Bertinelli & Arnaud Bourgain & Florian Léon, 2020. "Corruption and tax compliance: evidence from small retailers in Bamako, Mali," Applied Economics Letters, Taylor & Francis Journals, vol. 27(5), pages 366-370, March.
    11. Mengyu Zhang & Thanos Verousis & Iordanis Kalaitzoglou, 2022. "Information and the arrival rate of option trading volume," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(4), pages 605-644, April.
    12. Yang Hao, 2023. "Financial Market with Learning from Price under Knightian Uncertainty," Working Papers hal-03686748, HAL.
    13. Yu, Edison G., 2018. "Dynamic market participation and endogenous information aggregation," Journal of Economic Theory, Elsevier, vol. 175(C), pages 491-517.
    14. Nihad Aliyev, 2019. "Financial Markets with Multidimensional Uncertainty," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2019, January-A.
    15. Vitale, Paolo, 2018. "Robust trading for ambiguity-averse insiders," Journal of Banking & Finance, Elsevier, vol. 90(C), pages 113-130.
    16. Itay Goldstein & Liyan Yang, 2022. "Commodity Financialization and Information Transmission," Journal of Finance, American Finance Association, vol. 77(5), pages 2613-2667, October.
    17. Zhong, Zhuo, 2016. "Reducing opacity in over-the-counter markets," Journal of Financial Markets, Elsevier, vol. 27(C), pages 1-27.
    18. Huszár, Zsuzsa R. & Prado, Melissa Porras, 2019. "An analysis of over-the-counter and centralized stock lending markets," Journal of Financial Markets, Elsevier, vol. 43(C), pages 31-53.
    19. Jang, Bong-Gyu & Lee, Seungkyu & Lim, Byung Hwa, 2016. "Robust consumption and portfolio rules with time-varying model confidence," Finance Research Letters, Elsevier, vol. 18(C), pages 342-352.
    20. Helen Hui Huang & Yanjie Wang & Shunming Zhang, 2023. "Asset allocation, limited participation and flight‐to‐quality under ambiguity of correlation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 4604-4626, October.
    21. Takayuki Ogawa & Jun Sakamoto, 2018. "Welfare Implications of Mitigating Investment Uncertainty," Discussion Papers in Economics and Business 18-33-Rev., Osaka University, Graduate School of Economics, revised Dec 2018.
    22. Marmora, Paul & Rytchkov, Oleg, 2018. "Learning about noise," Journal of Banking & Finance, Elsevier, vol. 89(C), pages 209-224.
    23. Duong, Truong X. & Huszár, Zsuzsa R. & Yamada, Takeshi, 2015. "The costs and benefits of short sale disclosure," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 124-139.

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