Anomalies and Their Short-Sale Costs

Abstract

Short-sale costs eliminate the abnormal returns on asset pricing anomaly portfolios. While many anomalies persist out-of-sample before accounting for short-sale costs, they cannot be exploited with long-short strategies due to stock borrow fees. Using a comprehensive sample of 162 anomalies, the average long-short portfolio return is a significant 0.14% per month before short-sale costs, and the returns are due to the short leg. However, the average is -0.01% once returns are adjusted for borrow fees. Moreover, anomalies are not profitable even before fees if the high fee observations, representing 12% of stock dates, are excluded from the analysis.

Keywords: JEL Classification: G12, G13, G14 anomalies, stock return predictability, stock borrow fee, stock lending fee, limits to arbitrage

JEL Classification: G12, G13, G14