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Meeting ID: 964 2084 1762
Anomalies and Their Short-Sale Costs
Short-sale costs eliminate the abnormal returns on asset pricing anomaly portfolios. While many anomalies persist out-of-sample, they cannot profitably be exploited due to stock borrow fees. Using a comprehensive sample of 162 anomalies, the average long-short portfolio return is a significant 0.15% per month before short-sale costs, and the returns are due to the short leg. However, the average is −0.02% once returns are adjusted for borrow fees. The anomalies are not profitable even before accounting for fees if the high-fee observations, 12% of stock dates, are excluded from the analysis. Thus, short sale costs explain why many anomalies persist.
Neil D. Pearson is the Harry A. Brandt Distinguished Professor of Financial Markets and Options at the University of Illinois at Urbana-Champaign. He previously served on the faculty of the Simon Graduate School of Business Administration at the University of Rochester, as a Special Term Professor at Tsinghua University, as a Visiting Professor at the Massachusetts Institute of Technology, and as Visiting Academic Fellow at the U.S. Securities and Exchange Commission. His published research is in asset pricing and financial intermediation, and he teaches courses about the valuation of derivative financial instruments and the measurement of financial risks. In addition to publishing papers in a number of academic journals, Dr. Pearson is the author of Risk Budgeting: Portfolio Problem Solving Using Value at Risk (Wiley). He is an Associate Editor of the Journal of Financial Economics, the Journal of Financial and Quantitative Analysis, the Journal of Risk, and the Economics Bulletin. Dr. Pearson has extensive consulting experience on the valuation of financial instruments and the measurement and management of market and credit risk and is currently affiliated with Rutter Associates (NY). He received his Ph.D. from the Massachusetts Institute of Technology.