Have Capital Market Anomalies Worldwide Attenuated in the Recent Era of High Liquidity and Trading Activity?

32 Pages Posted: 31 Oct 2018

See all articles by Benjamin R. Auer

Benjamin R. Auer

Brandenburg University of Technology (BTU)

Horst Rottmann

University of Applied Sciences Amberg-Weiden

Date Written: 2018

Abstract

We revisit and extend the study by Chordia et al. (2014) which documents that, in recent years, increased liquidity has significantly decreased exploitable returns of capital market anomalies in the US. Using a novel international dataset of arbitrage portfolio returns for four well-known anomalies (size, value, momentum and beta) in 21 developed stock markets and more advanced statistical methodology (quantile regressions, Markov regime-switching models, panel estimation procedures), we arrive at two important findings. First, the US evidence in the above study is not fully robust. Second, while markets worldwide are characterised by positive trends in liquidity, there is no persuasive time-series and cross-sectional evidence for a negative link between anomalies in market returns and liquidity. Thus, this proxy of arbitrage activity does not appear to be a key factor in explaining the dynamics of anomalous returns.

Keywords: capital market anomalies, attenuation, liquidity, quantile regression, Markov regime-switching, panel analysis

JEL Classification: G140, G150

Suggested Citation

Auer, Benjamin R. and Rottmann, Horst, Have Capital Market Anomalies Worldwide Attenuated in the Recent Era of High Liquidity and Trading Activity? (2018). CESifo Working Paper No. 7204. Available at SSRN: https://ssrn.com/abstract=3275377

Benjamin R. Auer (Contact Author)

Brandenburg University of Technology (BTU) ( email )

PO Box 101344
Cottbus, 03013
Germany

Horst Rottmann

University of Applied Sciences Amberg-Weiden ( email )

Hetzenrichter Weg 15
96215 Lichtenfels
Germany

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