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Capital Market Efficiency and Arbitrage Efficacy

Published online by Cambridge University Press:  10 June 2016

Ferhat Akbas ,
Will J. Armstrong ,
Sorin Sorescu  and
Avanidhar Subrahmanyam
Ferhat Akbas
Affiliation:
akbas@ku.edu, University of Kansas, School of Business, Lawrence, KS 66045
Will J. Armstrong
Affiliation:
will.armstrong@ttu.edu, Texas Tech University, Rawls College of Business, Lubbock, TX 79409
Sorin Sorescu
Affiliation:
ssorescu@tamu.edu, Texas A&M University, Mays Business School, College Station, TX 77843
Avanidhar Subrahmanyam*
Affiliation:
subra@anderson.ucla.edu, Nanjing University, School of Management and Engineering, Jiangsu Province, 210093 China, and University of California at Los Angeles, Anderson School of Management, Los Angeles, CA 90095.
*
*Corresponding author: subra@anderson.ucla.edu
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Abstract

Efficiency in the capital markets requires that capital flows are sufficient to arbitrage anomalies away. We examine the relation between flows to a quantitative (quant) strategy that is based on capital market anomalies and the subsequent performance of this strategy. When these flows are high, quant funds are able to implement arbitrage strategies more effectively, which in turn leads to lower profitability of market anomalies in the future, and vice versa. Thus, the degree of cross-sectional equity market efficiency varies across time with the availability of arbitrage capital.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 2 , April 2016 , pp. 387 - 413
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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