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Costly Long‐Short Strategies Under Short‐Sale Constraints: Chinese Evidence

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  • Timothy (Jun) Lu
  • Jinjuan Ren
  • Yan Zhao

Abstract

Long‐short portfolios based on market anomalies are subject to ubiquitous short‐sale constraints. Few studies directly quantify the impact of shorting on long‐short strategies, largely due to the complexity of the shorting practice. We examine the Chinese market, in which the scope of the short‐sale constraint and the shorting cost are clearly specified. Among size, value, and momentum strategies, we find that only size earns significant profits before short‐sale constraints are considered. Imposing the scope of short‐sale constraint by selling only shortable stocks does not materially change the profits. Deducting shorting costs, however, essentially wipes off all the profits of long‐short portfolios.

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  • Timothy (Jun) Lu & Jinjuan Ren & Yan Zhao, 2018. "Costly Long‐Short Strategies Under Short‐Sale Constraints: Chinese Evidence," International Review of Finance, International Review of Finance Ltd., vol. 18(4), pages 743-751, December.
    • Handle: RePEc:bla:irvfin:v:18:y:2018:i:4:p:743-751
    DOI: 10.1111/irfi.12160
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    Cited by:

    1. Jansen, Maarten & Swinkels, Laurens & Zhou, Weili, 2021. "Anomalies in the China A-share market," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    2. Dimitrios Koutmos & Bochen Wu & Qi Zhang, 2020. "In search of winning mutual funds in the Chinese stock market," Review of Quantitative Finance and Accounting, Springer, vol. 54(2), pages 589-616, February.

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