Abstract
We utilize the special institutional setting in China, in which the tightness of short-sale constraints and shorting costs are clearly specified, to examine the impact of shorting on the profits of zero-cost strategies based on the size, value, and momentum anomalies. The major results are as follows. (1) After the short-sale reform in 2010, only the size strategy delivers a positive alpha. The value and momentum strategies are unprofitable. (2) After we impose the short-sale constraints by including only shortable stocks in the short-leg portfolio, profits of the size strategy are largely unaffected. (3) After rebate cost, profits on the size strategy are wiped off. (4) Profits of the size strategy come mainly from the long leg. To conclude, the impact of shorting is nontrivial: no anomalies exist after shorting costs are considered.
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