The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies

60 Pages Posted: 1 Dec 2015 Last revised: 25 Jul 2018

See all articles by Yongqiang Chu

Yongqiang Chu

Belk College of Business, UNC Charlotte

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Liang Ma

University of South Carolina - Darla Moore School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: July 24, 2018

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: G12, G18

Suggested Citation

Chu, Yongqiang and Hirshleifer, David A. and Ma, Liang, The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies (July 24, 2018). 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

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

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

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Liang Ma (Contact Author)

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

1014 Greene Street
Columbia, SC 29208
United States
803-777-6366 (Phone)

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

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