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The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies

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  • YONGQIANG CHU
  • DAVID HIRSHLEIFER
  • LIANG MA

Abstract

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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  • 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.
    • Handle: RePEc:bla:jfinan:v:75:y:2020:i:5:p:2631-2672
    DOI: 10.1111/jofi.12947
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G4 - Financial Economics - - Behavioral Finance

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