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The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies
Author(s) -
CHU YONGQIANG,
HIRSHLEIFER DAVID,
MA LIANG
Publication year - 2020
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12947
Subject(s) - anomaly (physics) , econometrics , arbitrage , capital asset pricing model , portfolio , arbitrage pricing theory , economics , asset (computer security) , financial economics , statistical arbitrage , set (abstract data type) , limits to arbitrage , actuarial science , risk arbitrage , computer science , physics , computer security , condensed matter physics , programming language
We examine the causal effect of limits to arbitrage on 11 well‐known asset pricing anomalies using the pilot program of Regulation SHO, which relaxed short‐sale constraints for a quasi‐random set of pilot stocks, as a natural experiment. We find that the anomalies became weaker on portfolios constructed with pilot stocks during the pilot period. The pilot program reduced the combined anomaly long–short portfolio returns by 72 basis points per month, a difference that survives risk adjustment with standard factor models. The effect comes only from the short legs of the anomaly portfolios.