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The Limits of the Limits of ArbitrageAlon P. BravDuke University - Fuqua School of Business J.B. Heaton IIIBartlit Beck Herman Palenchar & Scott LLP Si LiWilfrid Laurier University - School of Business & Economics June 14, 2006 Review of Finance, Forthcoming Abstract: We provide evidence that the limits of arbitrage approach cannot explain economically important asset pricing anomalies. Anomalous positive stock returns (to small firms, value firms, recent winners, and firms with positive abnormal earnings announcements) are strongest when limits to arbitrage are lowest, directly contrary to the prediction of theories resting on limits to arbitrage. Anomalously poor returns to small growth stocks do occur only when limits to arbitrage are high, consistent with theories resting on limits to arbitrage, but affects less than 1% of the market value of the CRSP universe of United States common stocks.
Number of Pages in PDF File: 35 Keywords: Market Efficiency, Behavioral Finance, Limits on Arbitrage, Idiosyncratic Volatility JEL Classification: G11, G12, G14 Accepted Paper SeriesDate posted: July 12, 2006Suggested CitationContact Information
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