Have Capital Market Anomalies Attenuated in the Recent Era of High Liquidity and Trading Activity?

50 Pages Posted: 27 Mar 2012 Last revised: 23 Jul 2014

Tarun Chordia

Emory University - Department of Finance

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Qing Tong

Singapore Management University - Lee Kong Chian School of Business

Date Written: May 12, 2014

Abstract

We examine whether the recent regime of increased liquidity and trading activity is associated with attenuation of prominent equity return anomalies due to increased arbitrage. We find that the majority of the anomalies have attenuated, and the average returns from a portfolio strategy based on prominent anomalies have approximately halved after decimalization. We provide evidence that hedge fund assets under management, short interest and aggregate share turnover have led to the decline in anomaly-based trading strategy profits in recent years. Overall, our work indicates that policies to stimulate liquidity and ameliorate trading costs improve capital market efficiency.

Keywords: Anomalies, market efficiency, cross-section of returns

JEL Classification: G12, G14

Suggested Citation

Chordia, Tarun and Subrahmanyam, Avanidhar and Tong, Qing, Have Capital Market Anomalies Attenuated in the Recent Era of High Liquidity and Trading Activity? (May 12, 2014). Journal of Accounting & Economics (JAE), Vol. 58, No. 1, 2014. Available at SSRN: https://ssrn.com/abstract=2029057 or http://dx.doi.org/10.2139/ssrn.2029057

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Qing Tong

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stanford Road
Singapore, 178899
Singapore

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