Momentum Cycles and Limits to Arbitrage - Evidence from Victorian England and Post-Depression US Stock Markets
Benjamin Remy Chabot
Federal Reserve Bank of Chicago
University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics
Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad
December 9, 2009
We evaluate the importance of “Limits to Arbitrage” to explain profitability of momentum strategies. Specifically, when the availability of arbitrage capital is in short supply, momentum cycles last longer, and breaks in momentum cycles are shorter. We demonstrate the robustness of our findings with a unique database of stock returns from 1866-1907 London and the CRSP database. Momentum cycle durations are similar in both databases and all other momentum facts documented in the literature using the CRSP database hold for the Victorian period as well, except for the January reversal due to the absence of capital gains taxation.
Number of Pages in PDF File: 66
Keywords: Limit to arbitrage, Momentum
JEL Classification: G1, G12, G14
Date posted: December 12, 2009 ; Last revised: February 22, 2014
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