Arbitrage Risk and the Book-to-Market Anomaly

31 Pages Posted: 11 Jul 2002

See all articles by Ashiq Ali

Ashiq Ali

University of Texas at Dallas - Naveen Jindal School of Management

Lee-Seok Hwang

Seoul National University - College of Business Administration

Mark A. Trombley

University of Arizona - Eller College of Management

Multiple version iconThere are 2 versions of this paper

Date Written: June 19, 2002

Abstract

This paper shows that the book-to-market (B/M) effect is greater for stocks with higher idiosyncratic return volatility, higher transaction costs and lower investor sophistication, consistent with the market mispricing explanation for the anomaly. The B/M effect for high volatility stocks exceeds that for the low volatility stocks in 20 of the 22 sample years. Also, volatility exhibits significant incremental power beyond the transaction costs and investor sophistication measures in explaining cross-sectional variation in the B/M effect. These findings are consistent with the Shleifer and Vishny (1997) thesis that risk associated with the volatility of arbitrage returns deters arbitrage activity and is an important reason why the B/M effect exists.

Keywords: arbitrage risk, book-to-market, mispricing, transaction costs, investor sophistication

JEL Classification: G11, G14

Suggested Citation

Ali, Ashiq and Hwang, Lee-Seok and Trombley, Mark A., Arbitrage Risk and the Book-to-Market Anomaly (June 19, 2002). Available at SSRN: https://ssrn.com/abstract=316659 or http://dx.doi.org/10.2139/ssrn.316659

Ashiq Ali (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 West Campbell Road, SM41
Richardson, TX 75080-3021
United States
972-883-6360 (Phone)
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HOME PAGE: http://www.utdallas.edu/~axa042200/

Lee-Seok Hwang

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Mark A. Trombley

University of Arizona - Eller College of Management ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-4805 (Phone)
520-621-3742 (Fax)

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