In his 21 November 2014 blog post, Dusty Corners of the Market, John Cochrane seems to imply that certain areas of the market tend to be more resilient to the forces of arbitrage and efficiency.
The paper he provides as an example discusses the cross-section of asset pricing anomalies with respect to sorts performed on the cost to short. The intuition is that asset pricing anomalies should be more pronounced for expensive-to-short securities because would-be shorts-sellers are discouraged and/or prohibited from taking positions which might counterbalance the bullish stances of longs. The evidence supports this intuition; many anomalies appear to be dependent on the hard-to-short anomaly.
I indeed interpret this as evidence for the broader intuition that pricing inefficiencies should be more pronounced and resilient within the market's dusty corners (e.g., under-covered securities and/or securities where barriers to arbitrage forces inhibit market efficiency mechanisms). The 2008 Fama-French paper, Dissecting Anomalies also (indirectly) alludes to this premise by sorting anomalies based on market cap size (i.e., SmB), noting that the strength of some anomalies can be expressed as a function of size.
- What are some indicators that a given security might be inefficiently priced?
- What about efficiently priced (i.e., how can we estimate the degree of information already baked into price)?
- Other than anomalies which can be explained by long/short information asymmetry, what are some are other examples of limits-to-arbitrage?