University of South Carolina
Darla Moore School of Business
1014 Greene Street
Columbia, SC 29208
Institutional Affiliation: University of South Carolina
NBER Working Papers and Publications
|December 2017||The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies|
with Yongqiang Chu, David Hirshleifer: w24144
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.
forthcoming, Journal of Finance.