High Sharpe Ratios
Saturday, Jan. 7, 2017 1:00 PM – 3:00 PM
- Chair: Alexi Savov, New York University
Deviations from Covered Interest Rate Parity
AbstractWe find that deviations from the covered interest rate parity condition (CIP) imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world. Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs. Furthermore, these deviations are higher at quarter ends, lower after taking into account balance sheet costs of wholesale dollar funding, co-move other near risk-free fixed income spreads, and are highly correlated with nominal interest rates. These empirical findings point to key frictions in financial intermediation and their interactions with international imbalances in the new regulatory environment during the post-Global Financial Crisis period.
A First Glimpse Into the Short Side of Hedge Funds
AbstractWe provide direct evidence about the profitability of hedge fund short trades in equities. We identify the opening and closing of equity short sales (and long side trades) by hedge funds and other institutional investors by combining data on the detailed transactions and holdings of the investors. Hedge fund short sales covered within five trading days are highly profitable, earning an average abnormal return of 14 bps per day, but short positions kept open longer than five days are not profitable. In contrast, non-hedge fund institutional investors do not make profits but rather tend to suffer losses on their short trades. Additional evidence suggests that some of the profitability of short trades is due to information and some stems from liquidity provision in both opening and covering trades, and that short selling profitability is persistent.
- G1 - Asset Markets and Pricing