Shorting Costs and Profitability of Long–Short Strategies

39 Pages Posted: 9 Mar 2020

See all articles by Dongcheol Kim

Dongcheol Kim

Korea University Business School

Byeung Joo Lee

Korea University Business School (KUBS)

Date Written: May 2019

Abstract

We examine how profitability of long–short arbitrage strategies based on anomalies is affected after adjustment for two shorting costs: implicit cost due to unavailability of stocks in the short-leg to sell short and loan fee actually paid to stock lenders. The combined shorting cost amounts to almost 40 percent of gross long–short arbitrage raw returns over the sample period from January 2006 to December 2017. After adjustment for these shorting costs, long–short arbitrage profits are thus reduced by almost 40 percent. Even after adjustment for risk, the proportion of shorting costs is also substantial. If other trade-related transaction costs are considered, long–short arbitrage profits would be reduced further. Our results provide explicit evidence that casts doubt on the profitability of long-short arbitrage strategies based on anomalies.

Keywords: Shorting costs, Long–short strategies, Arbitrage returns, Anomalies, Short sale, Loan fee

JEL Classification: G12, G14

Suggested Citation

Kim, Dongcheol and Lee, Byeung Joo, Shorting Costs and Profitability of Long–Short Strategies (May 2019). Available at SSRN: https://ssrn.com/abstract=3519706 or http://dx.doi.org/10.2139/ssrn.3519706

Dongcheol Kim (Contact Author)

Korea University Business School ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea
+82-2-3290-2606 (Phone)

Byeung Joo Lee

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

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