Bige Kahraman

Who Trades Against Mispricing

We provide evidence that open-end structures undermine asset managers’ incentives to attack long-term mispricing. First, we compare open-end funds with closed-end funds. Closed-end funds purchase more underpriced stocks than open-end funds, especially if the stocks involve high arbitrage risk. We then show that hedge funds with high share restrictions, having a lower degree of open-ending, also trade against long-term mispricing to a larger extent than other hedge funds. Our analysis suggests that open-end organizational structures are not conducive to long-term risky arbitrage.

Trader Leverage and Liquidity

Do traders’ leverage constraints drive equity market liquidity? We use the unique features of the margin trading system in India to test the hypothesis that there is a causal relationship between traders’ leverage constraints (i.e., their ability to borrow to invest in risky assets) and a stock’s market liquidity. In India, the list of stocks eligible for margin trading is revised every month, creating a series of quasi-experiments that provide traders of newly eligible and ineligible stocks with shocks to the availability of leverage. We employ a regression discontinuity design that exploits the threshold rules that determine a stock’s margin trading eligibility. When we compare the liquidity of eligible and ineligible stocks that lie close to the eligibility threshold, we find that liquidity is higher when stocks become eligible for margin trading and that it decreases with ineligibility. Using available data on margin financing activity at the individual stock level, we try to uncover the mechanisms driving this main finding. We find evidence consistent with the idea that the liquidity enhancement that we observe stems from margin traders’ contrarian strategies.Does trader leverage drive equity market liquidity? We use the unique features of the margin trading system in India to identify a causal relationship between traders’ ability to borrow and a stock’s market liquidity. To quantify the impact of trader leverage, we employ a regression discontinuity design that exploits threshold rules that determine a stock’s margin trading eligibility. We find that liquidity is higher when stocks become eligible for margin trading and that this liquidity enhancement is driven by margin traders’ contrarian strategies. Consistent with downward liquidity spirals due to deleveraging, we also find that this effect reverses during crises.

Publicizing Private Information

What is the impact of greater publicity in the shorting market on informational efficiency? To answer this, we exploit rule amendments in U.S. securities markets which increased the frequency of public disclosure of short interest. Theoretically, greater public disclosure can improve or deteriorate informational efficiency. We find that with more frequent disclosure, short-sellers’ private information is incorporated into prices faster, improving informational efficiency. We also document significant market reactions to short interest announcements, suggesting investor learning, and furthermore, reductions in short-sellers’ horizon risk and holding periods.What is the impact of greater publicity in the shorting market on informational efficiency? To answer this, we exploit rule amendments in U.S. securities markets which increased the frequency of public disclosure of short interest. Theoretically, greater public disclosure can improve or deteriorate informational efficiency. We find that with more frequent disclosure, short-sellers’ private information is incorporated into prices faster, improving informational efficiency. We also document significant market reactions to short interest announcements, suggesting investor learning, and furthermore, reductions in short-sellers’ horizon risk and holding periods.

Show Us Your Shorts

What is the impact of greater publicity in the shorting market on informational efficiency? To answer this, we exploit rule amendments in U.S. securities markets which increased the frequency of public disclosure of short interest. Theoretically, greater public disclosure can improve or deteriorate informational efficiency. We find that with more frequent disclosure, short-sellers’ private information is incorporated into prices faster, improving informational efficiency. We also document significant market reactions to short interest announcements, suggesting investor learning, and furthermore, reductions in short-sellers’ horizon risk and holding periods.What is the impact of greater publicity in the shorting market on informational efficiency? To answer this, we exploit rule amendments in U.S. securities markets which increased the frequency of public disclosure of short interest. Theoretically, greater public disclosure can improve or deteriorate informational efficiency. We find that with more frequent disclosure, short-sellers’ private information is incorporated into prices faster, improving informational efficiency. We also document significant market reactions to short interest announcements, suggesting investor learning, and furthermore, reductions in short-sellers’ horizon risk and holding periods.

The Impact of Increased Public Disclosure Policies in the Shorting Market

What is the impact of greater publicity in the shorting market on informational efficiency? To answer this, we exploit rule amendments in U.S. securities markets which increased the frequency of public disclosure of short interest. Theoretically, greater public disclosure can improve or deteriorate informational efficiency. We find that with more frequent disclosure, short-sellers’ private information is incorporated into prices faster, improving informational efficiency. We also document significant market reactions to short interest announcements, suggesting investor learning, and furthermore, reductions in short-sellers’ horizon risk and holding periods.What is the impact of greater publicity in the shorting market on informational efficiency? To answer this, we exploit rule amendments in U.S. securities markets which increased the frequency of public disclosure of short interest. Theoretically, greater public disclosure can improve or deteriorate informational efficiency. We find that with more frequent disclosure, short-sellers’ private information is incorporated into prices faster, improving informational efficiency. We also document significant market reactions to short interest announcements, suggesting investor learning, and furthermore, reductions in short-sellers’ horizon risk and holding periods.