Review of Finance, Forthcoming
35 Pages Posted: 12 Jul 2006
Date Written: June 14, 2006
We provide evidence that the limits of arbitrage approach cannot explain economically important asset pricing anomalies. Anomalous positive stock returns (to small firms, value firms, recent winners, and firms with positive abnormal earnings announcements) are strongest when limits to arbitrage are lowest, directly contrary to the prediction of theories resting on limits to arbitrage. Anomalously poor returns to small growth stocks do occur only when limits to arbitrage are high, consistent with theories resting on limits to arbitrage, but affects less than 1% of the market value of the CRSP universe of United States common stocks.
Keywords: Market Efficiency, Behavioral Finance, Limits on Arbitrage, Idiosyncratic Volatility
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation
Brav, Alon and Heaton, J.B. and Li, Si, The Limits of the Limits of Arbitrage (June 14, 2006). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=901075