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, they cannot profitably be exploited due to stock borrow fees. Using a comprehensive sample of 162 anomalies, the average long-short portfolio return is a significant 0.15% per month before short-sale costs, and the returns are due to the short leg. However, the average is -0.02% once returns are adjusted for borrow fees. The anomalies are not profitable even before accounting for fees if the high-fee observations, 12% of stock dates, are excluded from the analysis. Thus, short sale costs explain why many anomalies persist.

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

JEL Classification: G12, G13, G14