The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies
62 Pages Posted: 1 Dec 2015 Last revised: 2 Dec 2019
Date Written: November 25, 2019
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: Suggested Citation