Working Paper: NBER ID: w24144
Authors: 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.
Keywords: arbitrage; asset pricing anomalies; short-sale constraints; Regulation SHO
JEL Codes: G12; G18; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| limits to arbitrage (G19) | asset pricing anomalies (G12) |
| pilot program (J68) | limits to arbitrage (G19) |
| pilot firms (M13) | reduced anomaly returns (C29) |
| short-sale constraints relaxation (G33) | anomaly returns (Y60) |
| pilot period (Y20) | anomaly returns (Y60) |
| pilot program ended (J68) | difference in anomaly returns vanishing (C29) |