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Stock and option markets can at times reflect differing information. We identify three reasons for the presence of these periods of ’disagreement’ between the cash and derivatives markets: 1) high volatility and noise trading; 2) high level of risk aversion; 3) speculation versus hedging trades. This paper investigates the role that hedge funds, a proxy for sophisticated investors, play in the price discovery process between stock and option markets and the disagreement/agreement periods. We observe that a disparity in information between the two markets is often associated with deleveraging in directional exposures and reversal strategies. Posterior to the event, active tactical asset allocation in small and value factor investing takes place. We investigate four specific macro events which resulted in significant rebalancing by hedge fund manegers: the Thai Baht depreciation, the Dot-com bubble, the credit crunch and the Nasdaq correction.
Author(s):
Marie Lambert
HEC Liège, ULg
Belgium
Federico Platania
ôle Universitaire Léonard de Vinci. Ecole de Management Léonard De Vinci (EMLV) - Ecole supérieure d’ingénieurs Léonard De Vinci (ESILV)
France
Nicolas Papageorgiou
HEC Montréal
Canada