What Explains the Dynamics of 100 Anomalies?

55 Pages Posted: 15 Feb 2015 Last revised: 8 Nov 2015

Heiko Jacobs

University of Duisburg-Essen, Campus Essen

Date Written: March 23, 2015

Abstract

Are anomalies strongest when investor sentiment or limits of arbitrage are considered to be greatest? We empirically explore these theoretically deducted predictions. We first identify, categorize, and replicate 100 long-short anomalies in the cross-section of expected equity returns. We then comprehensively study their interaction with popular proxies for time-varying market-level sentiment and arbitrage conditions. We find a powerful (relatively weak) role of the variation in proxies for sentiment (arbitrage constraints). In this context, the predictive power of sentiment is mostly restricted to the short leg of strategy returns. Our insights collectively suggest that the dynamics of sentiment combined with the base level (and not primarily the variations) of limits to arbitrage provide at least a partial explanation for inefficiencies.

Keywords: anomalies, limits to arbitrage, sentiment, return predictability, behavioral finance

JEL Classification: G12, G14

Suggested Citation

Jacobs, Heiko, What Explains the Dynamics of 100 Anomalies? (March 23, 2015). Journal of Banking and Finance, Volume 57, Pages 65–85. Available at SSRN: https://ssrn.com/abstract=2564706 or http://dx.doi.org/10.2139/ssrn.2564706

Heiko Jacobs (Contact Author)

University of Duisburg-Essen, Campus Essen ( email )

Universitätsstr. 9
Essen, 45141
Germany
+49-(0)621-181-3453 (Phone)
+49-(0)621-181-1534 (Fax)

HOME PAGE: http://sites.google.com/site/heikojacobsfinance/

Register to save articles to
your library

Register

Paper statistics

Downloads
840
rank
24,816
Abstract Views
2,707
PlumX