Ludwig Chincarini (University of San Francisco)

Crowded Spaces and Anomalies

Abstract. This paper investigates the relation between crowded trades, those in which many investors hold the same stocks possibly exhausting their liquidity provision, and future stock returns on a set of well-known stock market anomalies. We find that anomaly risk-adjusted returns appear to be concentrated among the most (least) crowded stocks for the long-leg (short-leg) portfolio. Moreover, we find that our results remain significant after publication dates. We hypothesize that crowded equity positions in anomaly stocks increase institutional investor’s exposure to crash risk and liquidity risk. Our findings are consistent with this hypothesis and suggest that crowding adds a new consideration to the limits of arbitrage.

Joint with Renato Lazo-Paz and Fabio Moneta.