(Presentation Slides) The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies
28 Pages Posted: 21 Aug 2018
Date Written: January 8, 2017
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. Paper is available here: https://ssrn.com/abstract=2696672.
Keywords: Limits to Arbitrage, Anomalies, Short Sale Constraints, Regulation SHO
JEL Classification: G12, G18
Suggested Citation: Suggested Citation