Which Anomalies Are More Popular? And Why?
Purdue University - Krannert School of Management
Florida State University
September 8, 2013
We document and discuss cues that drive arbitrageurs’ behavior. In particular, we test, for a wide set of anomalies, whether arbitrageurs trade on anomalies, which anomalies attract the most arbitrage efforts, and what this reveals about arbitrageurs’ decision-making process. Arbitrage involvement is inferred via changes in short interest when a security falls into the “short leg” of an anomaly strategy, and we provide evidence that this method generally succeeds in capturing arbitrage activity. Our findings suggest that arbitrageurs trade on anomalies, but that situational preference is given to high-volatility strategies. We argue this behavior is induced by asymmetric compensation contracts.
Number of Pages in PDF File: 44
Keywords: Arbitrageur Behavior, Incentive Effects of Contracts
JEL Classification: G11, G12, G14working papers series
Date posted: August 30, 2012 ; Last revised: September 9, 2013
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