Journal of Finance Vol. 64 No. 4 2009
Presidential Address: Sophisticated Investors and Market Efficiency
Abstract
Stock-market trading is increasingly dominated by sophisticated professionals, as opposed to individual investors. Will this trend ultimately lead to greater market efficiency? I consider two complicating factors. The first is crowding—the fact that, for a wide range of “unanchored” strategies, an arbitrageur cannot know how many of his peers are simultaneously entering the same trade. The second is leverage—when an arbitrageur chooses a privately optimal leverage ratio, he may create a fire-sale externality that raises the likelihood of a severe crash. In some cases, capital regulation may be helpful in dealing with the latter problem.
- DOI
- https://doi-org.simsrad.net.ocs.mq.edu.au/10.1111/j.1540-6261.2009.01472.x
- Volume
- 64
- Issue
- 4
- Pages
- 1517-1548
- Sources
- bibtex:phds-export.bib