The Limits of the Market-wide Limits of Arbitrage: Insights from the Dynamics of 100 Anomalies

• Main Author: JACOBS, Hieiko
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: anomalies; limits to arbitrage; return predictability; market frictions; behavioral finance; Corporate Finance; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/bnp_research/37; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1036&context=bnp_research
• Institution: Singapore Management University

Are anomalies strongest when limits of arbitrage are widely considered to be greatest? We empirically explore this theoretically deducted prediction. We first identify, categorize, and replicate 100 anomalies in the cross-section of expected equity returns. We then comprehensively study their dynamic interaction with popular proxies for time-varying market-level arbitrage conditions. Our findings reveal a surprisingly weak role of commonly employed measures of market-wide arbitrage risks and constraints. Even though this “big picture” evidence is by no means conclusive, our findings might potentially be best interpreted as supporting the growing literature which uncovers some shortcomings of the limits to arbitrage argument.