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.
For helpful comments and suggestions, we thank Wei Xiong (the Editor), an anonymous Associate Editor, two anonymous referees, Karl Diether, Lukasz Pomorski, Jeffrey Pontiff, Lin Sun, and participants at the 2016 Rodney L. White Center for Financial Research Conference on Financial Decisions and Asset Markets at Wharton and the 2017 American Finance Association Meetings. This research has received financial support from the Moore School Research Grant Program. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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