Have Capital Market Anomalies Attenuated in the Recent Era of High Liquidity and Trading Activity

By Tarun Chordia, Avanidhar Subrahmanyam, Qing Tong. 2014

428 citations recorded by the source corpus.

We examine whether the recent regime of increased liquidity and trading activity is associated with attenuation of prominent equity return anomalies due to increased arbitrage. We find that the majority of the anomalies have attenuated and the average returns from a portfolio strategy based on prominent anomalies have approximately halved after decimalization. We provide evidence that hedge fund assets under management, short interest and aggregate share turnover have led to the decline in anomaly-based trading strategy profits in recent years. Overall, our work indicates that policies to stimulate liquidity and ameliorate trading costs improve capital market efficiency.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/959fc16b8afe2017ee574223fbe470d4d7859698

How researchers see this paper

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In Accounting

1. R. Gibson Brandon
2. Philipp Krueger
3. P. Schmidt
4. Caroline Flammer
5. Chitru S. Fernando

In Economics and Econometrics

1. Philipp Krueger
2. P. Schmidt

In Finance

1. R. Gibson Brandon
2. Philipp Krueger
3. P. Schmidt

Citations in the corpus

• ESG Preference, Institutional Trading, and Stock Return Patterns (2020, neutral): “Our results are also robust to an alternative composite mispricing score measure covering 12 anomalies used in Chordia et al. (2014).17”
• The History of the Cross Section of Stock Returns (2016, neutral): “…examine anomalies in domestic equity markets by exploiting sample periods prior to (e.g., Jaffe et al. (1989) and Wahal (2016)) or after (e.g,. Jegadeesh and Titman (2001), Schwert (2003), Chordia et al. (2014), and McLean and Pontiff (2016)) the original sample period used to discover the anomaly.”
• Time-Varying Liquidity and Momentum Profits (2016, neutral): “While the evidence in Chordia, Subrahmanyam, and Tong (2014) is unconditional, the main focus of our paper is on the time-varying nature of momentum payoffs.”
• ESG Rating Disagreement and Stock Returns (2019, background): “In a similar spirit, Chordia, Subrahmanyam, and Tong (2014) showed that capital market anomalies have attenuated in recent periods, coinciding with periods that have been accompanied by significant liquidity increases.”
• Size matters, if you control your junk (2018, neutral): “Large firms tend to be high-quality firms on any of the above dimensions or measures, while small 1 See Dichev (1998), Chan et al. (20 0 0), Horowitz et al. (20 0 0), Gompers and Metrick (2001), Van Dijk (2013), Israel and Moskowitz (2013), Mclean and Pontiff (2016) , and Chordia et al. (2014) .”