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Anomaly Discovery and Arbitrage Trading

delete2023-02-20
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OA
AI
X
Xi Dong
刘
刘琦 (Qi Liu) *
L
Lei Lu
孙波 cover
孙波 (Bo Sun)
H
Hongjun Yan
DOI：10.1017/S0022109023000145delete
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Abstract

Abstract

En 中文
We analyze a model in which an anomaly is unknown to arbitrageurs until its discovery, and test the model implications on both asset prices and arbitrageurs' trading activities. Using data on 99 anomalies documented in the existing literature, we find that the discovery of an anomaly reduces the correlation between the returns of its decile-1 and decile-10 portfolios. This discovery effect is stronger if the aggregate wealth of hedge funds is more volatile. Finally, hedge funds increase (reverse) their positions in exploiting anomalies when their aggregate wealth increases (decreases), further suggesting that these discovery effects operate through arbitrage trading.
Keywords:
INSTITUTIONAL INVESTORS
COSTLY ARBITRAGE
CROSS-SECTION
RETURN
LIMITS
LIQUIDITY
FUNDS
RISK

Journal

Journal of Financial and Quantitative Analysis cover
Journal of Financial and Quantitative Analysis
IF:
2.8
Papers:
2.3K
Citations:
1.0W

Organization

U
University of Manitoba
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B
baruch college (cuny)
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Citations: 0
U
University of Virginia
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3.0W
Papers: 2.7W
Citations: 4.1W
P
peking university
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11.7W
Papers: 8.7W
Citations: 146
C
city university of new york (cuny) system
Scholars:
1.6W
Papers: 1.5W
Citations: 26
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