The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies
We examine the causal effect of limits to arbitrage on 11 well-known asset pricing anomalies using the pilot program of Regulation SHO, which relaxed short-sale constraints for a quasi-random set of pilot stocks, as a natural experiment. We find that the anomalies became weaker on portfolios constructed with pilot stocks during the pilot period. The pilot program reduced the combined anomaly long-short portfolio returns by 72 basis points per month, a difference that survives risk adjustment with standard factor models. The effect comes only from the short legs of the anomaly portfolios.
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Copy CitationYongqiang Chu, David Hirshleifer, and Liang Ma, "The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies," NBER Working Paper 24144 (2017), https://doi.org/10.3386/w24144.Download Citation
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Published Versions
Yongqiang Chu & David Hirshleifer & Liang Ma, 2020. "The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 75(5), pages 2631-2672, October. citation courtesy of 
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