Working Paper: NBER ID: w15591
Authors: Benjamin Chabot; Eric Ghysels; Ravi Jagannathan
Abstract: We evaluate the importance of "Limits to Arbitrage" to explain profitability of momentum strategies. Specifically, when the availability of arbitrage capital is in short supply, momentum cycles last longer, and breaks in momentum cycles are shorter. We demonstrate the robustness of our findings with a unique database of stock returns from1866-1907 London and the CRSP database. Momentum cycle durations are similar in both databases and all other momentum facts documented in the literature using the CRSP database hold for the Victorian period as well, except for the January reversal due to the absence of capital gains taxation.
Keywords: No keywords provided
JEL Codes: G0; G10; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| limits to arbitrage (G19) | momentum cycles last longer (E32) |
| limits to arbitrage (G19) | breaks in momentum cycles are shorter (E32) |
| risk-free rate (G12) | duration of momentum profit or loss cycles (E32) |
| capital scarcity (D24) | momentum profitability (C69) |
| capital constraints (D24) | exacerbation of losses by sophisticated momentum traders (G41) |