Anomalies and Their Short-Sale Costs

52 Pages Posted: 15 Nov 2022

See all articles by Dmitriy Muravyev

Dmitriy Muravyev

Michigan State University - Department of Finance; Canadian Derivatives Institute

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: September 6, 2022

Abstract

We find that short sale costs eliminate the abnormal profits generated by asset pricing anomalies. While many anomalies persist out-of-sample, they cannot be profitably exploited due to stock borrow fees. Using a comprehensive sample of 162 anomalies, we show that the average of these long-short anomalies earns a significant 0.15% per month before costs. However, this average is -0.02% once portfolio returns are adjusted for stock borrow fees. Moreover, the anomalies are not profitable before accounting for borrow fees if the stocks with high borrow fees, 12% of all stocks, are excluded from the analysis. Thus, short sale costs explain why these anomalies exist despite arbitrageurs’ best efforts to exploit them.

Keywords: anomalies, stock return predictability, stock borrow fee, stock lending fee, data mining

JEL Classification: G12, G13, G14

Suggested Citation

Muravyev, Dmitriy and Pearson, Neil D. and Pollet, Joshua Matthew, Anomalies and Their Short-Sale Costs (September 6, 2022). Available at SSRN: https://ssrn.com/abstract=4266059 or http://dx.doi.org/10.2139/ssrn.4266059

Dmitriy Muravyev (Contact Author)

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Canadian Derivatives Institute ( email )

3000, chemin de la Côte-Sainte-Catherine
Montréal, Québec H3T 2A7
Canada

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 344-4311 (Phone)

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