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Komfie Manalo, Opalesque Asia: Researchers at Oxford University has found that the open-end structure of most investment vehicles discourages asset managers from trading against mispricing – to the detriment of investors and market efficiency.
"The findings from my study, co-authored with Professor Mariassunta Giannetti from the Stockholm School of Economics, raise the question of why so many financial institutions are open-ended, when the structure actually incentivizes against arbitrage," said Dr. Bige Kahraman, Associate Professor of Finance at Saïd Business School, University of Oxford. Kahraman added, "An open-end structure, in which investors can react to perceived under-performance by withdrawing capital, leads to short-termism and a persistent over- or under-valuing of assets."
Dr Giannetti and Kahraman's recent paper, "Who Trades Against Mispricing"? (Center for Economic Policy Research – Working Paper Series CEPR WP 11156), shows how organizational structure affects fund managers' incentives to profit from trading against under- or overpriced assets. Based on an analysis of about 1,500 U.S.-based funds over 20 years, the paper looked at differences in investment behavior by managers of open-ended funds, in which investors can invest or withdraw capital a...................... To view our full article Click here
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