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Have capital market anomalies attenuated in the recent era of high liquidity and trading activity?

journal contribution
posted on 2014-08-01, 00:00 authored by Tarun ChordiaTarun Chordia, A Subrahmanyam, Q Tong
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. Highlights •We examine if capital market anomalies have attenuated in recent years.•These years have been accompanied by significant liquidity increases.•We find that the majority of the anomalies have attenuated.•Returns to anomalies have approximately halved after decimalization.•Thus, policies to increase liquidity stimulate market efficiency.

History

Journal

Journal of Accounting and Economics

Volume

58

Pagination

41-58

Location

Amsterdam, The Netherlands.

ISSN

0165-4101

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2014 Elsevier

Issue

1

Publisher

Elsevier