The role of hedge funds in the asset pricing: evidence from China

Zhang, Jing; Zhang, Wei; Li, Youwei; Feng, Xu

Abstract

We document that hedge funds nurture mispricing in the Chinese financial market. We examine the relationship between hedge fund holdings and the degree of mispricing, assuming that hedge funds’ stock holdings are mainly for arbitrage and not for hedging. We also examine this relationship with and without short-selling restrictions. Hedge funds intentionally hold overvalued stocks. Their trades, which generate an abnormal return of 1.78% per month, also impede the dissipation of stock mispricing. Furthermore, we find that trend-chasing may explain why hedge funds prefer to hold overvalued stocks. This research provides a new perspectives on the information content and potential investment value of hedge fund holdings in emerging markets.

Citation

Zhang, J., Zhang, W., Li, Y., & Feng, X. (in press). The role of hedge funds in the asset pricing: evidence from China. The European journal of finance, 1-25. https://doi.org/10.1080/1351847X.2021.1929373

• Journal Article Type: Article
• Acceptance Date: Apr 22, 2021
• Online Publication Date: May 20, 2021
• Deposit Date: May 20, 2021
• Publicly Available Date: Nov 21, 2022
• Journal: European Journal of Finance
• Print ISSN: 1351-847X
• Electronic ISSN: 1466-4364
• Publisher: Routledge
• Peer Reviewed: Peer Reviewed
• Pages: 1-25
• DOI: https://doi.org/10.1080/1351847X.2021.1929373
• Keywords: Hedge funds; Stock mispricing; Asset pricing; Arbitrage
• Public URL: https://hull-repository.worktribe.com/output/3772265