The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies

61 Pages Posted: 28 Dec 2017

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: December 2017

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.

Suggested Citation

Chu, Yongqiang and Hirshleifer, David A. and Ma, Liang, The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies (December 2017). NBER Working Paper No. w24144. Available at SSRN: https://ssrn.com/abstract=3092992

Yongqiang Chu (Contact Author)

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
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Liang Ma

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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