The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies

62 Pages Posted: 1 Dec 2015 Last revised: 2 Dec 2019

See all articles by Yongqiang Chu

Yongqiang Chu

Belk College of Business, UNC Charlotte

David A. Hirshleifer

Marshall School of Business, USC; National Bureau of Economic Research (NBER)

Liang Ma

University of South Carolina - Darla Moore School of Business

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Date Written: November 25, 2019

Abstract

We examine the causal effect of limits to arbitrage on 11 well-known asset pricing anomalies using the pilot program of Regulation SHO, which relaxed short-sale constraints for a quasi-random set of pilot stocks, as a natural experiment. We find that the anomalies became weaker on portfolios constructed with pilot stocks during the pilot period. The pilot program reduced the combined anomaly long-short portfolio returns by 72 basis points per month, a difference that survives risk adjustment with standard factor models. The effect comes only from the short legs of the anomaly portfolios.

Keywords: Limits to Arbitrage, Anomalies, Short Sale Constraints, Regulation SHO

JEL Classification: G4, G12, G18

Suggested Citation

Chu, Yongqiang and Hirshleifer, David A. and Ma, Liang, The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies (November 25, 2019). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2696672 or http://dx.doi.org/10.2139/ssrn.2696672

Yongqiang Chu

Belk College of Business, UNC Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
7046877695 (Phone)

David A. Hirshleifer

Marshall School of Business, USC ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://https://sites.uci.edu/dhirshle/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Liang Ma (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

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