The Limits of the Limits of Arbitrage

Review of Finance, 14(1):157-187 (2010)

31 Pages Posted: 12 Jul 2006 Last revised: 30 Mar 2021

See all articles by Alon Brav

Alon Brav

Duke University - Fuqua School of Business; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

J.B. Heaton

One Hat Research LLC

Si Li

Wilfrid Laurier University - School of Business & Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 14, 2006

Abstract

We provide evidence that the limits of arbitrage approach cannot explain economically important asset pricing anomalies. Anomalous positive stock returns (to small firms, value firms, recent winners, and firms with positive abnormal earnings announcements) are strongest when limits to arbitrage are lowest, directly contrary to the prediction of theories resting on limits to arbitrage. Anomalously poor returns to small growth stocks do occur only when limits to arbitrage are high, consistent with theories resting on limits to arbitrage, but affects less than 1% of the market value of the CRSP universe of United States common stocks.

Keywords: Market Efficiency, Behavioral Finance, Limits on Arbitrage, Idiosyncratic Volatility

JEL Classification: G11, G12, G14

Suggested Citation

Brav, Alon and Heaton, J.B. and Li, Si, The Limits of the Limits of Arbitrage (June 14, 2006). Review of Finance, 14(1):157-187 (2010) , Available at SSRN: https://ssrn.com/abstract=901075

Alon Brav (Contact Author)

Duke University - Fuqua School of Business ( email )

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European Corporate Governance Institute (ECGI) ( email )

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National Bureau of Economic Research (NBER) ( email )

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J.B. Heaton

One Hat Research LLC ( email )

Chicago, IL
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HOME PAGE: http://www.onehatr.com/

Si Li

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

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