Arbitrage risk and the book-to-market anomaly

Ashiq Ali, Lee Seok Hwang, Mark A Trombley

Research output: Contribution to journalArticle

142 Citations (Scopus)

Abstract

This paper shows that the book-to-market (B/M) effect is greater for stocks with higher idiosyncratic return volatility, higher transaction costs, and lower investor sophistication, consistent with the market-mispricing explanation for the anomaly. The B/M effect for high volatility stocks exceeds that for the low volatility stocks in 20 of the 22 sample years. Also, volatility exhibits significant incremental power beyond transaction costs and investor sophistication measures in explaining cross-sectional variation in the B/M effect. These findings are consistent with the Shleifer and Vishny (1997) thesis that risk associated with the volatility of arbitrage returns deters arbitrage activity and is an important reason why the B/M effect exists.

Original languageEnglish (US)
Pages (from-to)355-373
Number of pages19
JournalJournal of Financial Economics
Volume69
Issue number2
DOIs
StatePublished - Aug 1 2003

Fingerprint

Arbitrage
Book-to-market
Book-to-market effect
Market anomalies
Investor sophistication
Transaction costs
Stock volatility
Market mispricing
Return volatility
Incremental
Anomaly

Keywords

  • Arbitrage risk
  • Book-to-market
  • Investor sophistication
  • Mispricing
  • Transaction costs

ASJC Scopus subject areas

  • Accounting
  • Strategy and Management
  • Economics and Econometrics
  • Finance

Cite this

Arbitrage risk and the book-to-market anomaly. / Ali, Ashiq; Hwang, Lee Seok; Trombley, Mark A.

In: Journal of Financial Economics, Vol. 69, No. 2, 01.08.2003, p. 355-373.

Research output: Contribution to journalArticle

Ali, Ashiq ; Hwang, Lee Seok ; Trombley, Mark A. / Arbitrage risk and the book-to-market anomaly. In: Journal of Financial Economics. 2003 ; Vol. 69, No. 2. pp. 355-373.
@article{bc1938089c564b0e86e5561f58446dff,
title = "Arbitrage risk and the book-to-market anomaly",
abstract = "This paper shows that the book-to-market (B/M) effect is greater for stocks with higher idiosyncratic return volatility, higher transaction costs, and lower investor sophistication, consistent with the market-mispricing explanation for the anomaly. The B/M effect for high volatility stocks exceeds that for the low volatility stocks in 20 of the 22 sample years. Also, volatility exhibits significant incremental power beyond transaction costs and investor sophistication measures in explaining cross-sectional variation in the B/M effect. These findings are consistent with the Shleifer and Vishny (1997) thesis that risk associated with the volatility of arbitrage returns deters arbitrage activity and is an important reason why the B/M effect exists.",
keywords = "Arbitrage risk, Book-to-market, Investor sophistication, Mispricing, Transaction costs",
author = "Ashiq Ali and Hwang, {Lee Seok} and Trombley, {Mark A}",
year = "2003",
month = "8",
day = "1",
doi = "10.1016/S0304-405X(03)00116-8",
language = "English (US)",
volume = "69",
pages = "355--373",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier",
number = "2",

}

TY - JOUR

T1 - Arbitrage risk and the book-to-market anomaly

AU - Ali, Ashiq

AU - Hwang, Lee Seok

AU - Trombley, Mark A

PY - 2003/8/1

Y1 - 2003/8/1

N2 - This paper shows that the book-to-market (B/M) effect is greater for stocks with higher idiosyncratic return volatility, higher transaction costs, and lower investor sophistication, consistent with the market-mispricing explanation for the anomaly. The B/M effect for high volatility stocks exceeds that for the low volatility stocks in 20 of the 22 sample years. Also, volatility exhibits significant incremental power beyond transaction costs and investor sophistication measures in explaining cross-sectional variation in the B/M effect. These findings are consistent with the Shleifer and Vishny (1997) thesis that risk associated with the volatility of arbitrage returns deters arbitrage activity and is an important reason why the B/M effect exists.

AB - This paper shows that the book-to-market (B/M) effect is greater for stocks with higher idiosyncratic return volatility, higher transaction costs, and lower investor sophistication, consistent with the market-mispricing explanation for the anomaly. The B/M effect for high volatility stocks exceeds that for the low volatility stocks in 20 of the 22 sample years. Also, volatility exhibits significant incremental power beyond transaction costs and investor sophistication measures in explaining cross-sectional variation in the B/M effect. These findings are consistent with the Shleifer and Vishny (1997) thesis that risk associated with the volatility of arbitrage returns deters arbitrage activity and is an important reason why the B/M effect exists.

KW - Arbitrage risk

KW - Book-to-market

KW - Investor sophistication

KW - Mispricing

KW - Transaction costs

UR - http://www.scopus.com/inward/record.url?scp=0038037439&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=0038037439&partnerID=8YFLogxK

U2 - 10.1016/S0304-405X(03)00116-8

DO - 10.1016/S0304-405X(03)00116-8

M3 - Article

AN - SCOPUS:0038037439

VL - 69

SP - 355

EP - 373

JO - Journal of Financial Economics

JF - Journal of Financial Economics

SN - 0304-405X

IS - 2

ER -