Abstract
This study examines arbitrage asymmetry effect on six well-known anomalies in China’s stock market. Using a comprehensive mispricing index constructed based on four popular mispricing measures, we show that anomalies are much more pronounced among overpriced stocks, but weaker or even reversed among underpriced stocks. Results also hold after controlling for several existing mispricing proxies and are stronger among stocks with high arbitrage costs. Our finding suggests that arbitrage costs that mostly result from short-sale constraints hinder correction of overpricing and increase the inefficiency of the stock market.
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