Costly long-short strategies under short-sale constraints: Chinese Evidence

Abstract

Long-short portfolios based on market anomalies are subject to ubiquitous short-sale constraints. Few studies directly quantify the impact of shorting on long-short strategies, largely due to the complexity of the shorting practice. We examine the Chinese market, in which the scope of the short-sale constraint and the shorting cost are clearly specified. Among size, value, and momentum strategies, we find that only size earns significant profits before short-sale constraints are considered. Imposing the scope of short-sale constraint by selling only shortable stocks does not materially change the profits. Deducting shorting costs, however, essentially wipes off all the profits of long-short portfolios.

Keywords: anomalies; short-sale constraint; shorting cost; China

JEL Classification: G11, G12, G15