Your Complete Guide to Factor-Based Investing: The Way Smart Money Invests Today by Andrew L. Berkin & Larry E. Swedroe

Author:Andrew L. Berkin & Larry E. Swedroe
Language: eng
Format: azw3, epub, pdf
Tags: Investing, Finance
Publisher: BAM ALLIANCE Press
Published: 2016-12-04T17:00:00+00:00

The results clearly show that the Regulation SHO pilot program, which reduced the impact of limits to arbitrage, also reduced the size of mispricings in hard-to-short stocks. Chu and colleagues concluded: “These results show that limits to arbitrage, and in particular, short-sale constraints play an important role in generating the ten well-known anomalies. These findings therefore suggest that these anomalies are, at a minimum, driven in substantial part by mispricing.”

These findings add further weight to an already large body of evidence from the field of behavioral finance showing that short-sale costs/constraints affect asset prices, allowing anomalies to persist. Investors can benefit from this knowledge by directly avoiding the purchase of stocks with well-known, negative anomaly characteristics, or by investing in long-only funds that screen out such stocks.

As a final note on these findings, the SEC adopted amendments to Regulation SHO in March 2011. Among the rule changes was SEC Rule 201 (the alternative uptick rule), a short-sale-related circuit breaker that, when triggered, imposes a restriction on prices at which securities may be sold short. The SEC also issued guidance for broker-dealers wishing to mark certain qualifying orders “short exempt.” Again, any constraint on short sales allows anomalies to persist.

The academic research provides another explanation, however, for why anomalies may persist.

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