Anmerkungen:
In: Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments January 14, 2009 erstellt
Beschreibung:
I test whether the persistence of the momentum and reversal effects is the result of idiosyncratic risk limiting arbitrage. Idiosyncratic deters arbitrage, regardless of the arbitrageur's level of diversification. Reversal is prevalent only in high idiosyncratic risk stocks, suggesting that idiosyncratic risk limits arbitrage in reversal mispricing. This finding is robust to controls for transaction costs, informed trading, and systematic relations between idiosyncratic risk and subsequent returns. Momentum is not related to idiosyncratic risk. Momentum generates a smaller aggregate return than reversal, so the findings along with those in related studies suggest that transaction costs are sufficient to prevent arbitrageurs from eliminating momentum mispricing