Factors Affecting the Implementability of Stock Market Trading Strategies

A substantial body of academic literature provides evidence of stock market trading strategies that generate appreciable abnormal returns. However, there are a number of factors that could partially or fully mitigate the ability of market participants to implement these trading strategies, such as price pressure, restrictions against short sales, and incentives to hold no more than 5% ownership in a firm. We investigate the extent to which these factors account for the evidence of abnormal returns found in seven trading strategies documented in prior research. We find that the size and return reversal trading strategies do not perform well in the presence of the various constraints, whereas the cash flow-to-price, return momentum, post-earnings announcement drift, and operating accrual strategies generally continue to generate significant positive abnormal returns. We find that the book-to-market strategy generates significant positive abnormal returns in about 50% of the scenarios we examine. We find that all of the strategies generate positive abnormal returns in the presence of the restriction against short sales, but that price impact adjustments and constraints on holding more than a 5% stake in any portfolio firm each have a large negative effect on portfolio returns. We also find that equally-weighted portfolio allocations generally perform better than value-weighted allocations and funds with a greater number of stocks and/or lower initial market capitalization also generally produce higher returns. Finally, we find that portfolios that engage in short positions perform worse than long-only portfolios due primarily to the sustained increase in stock prices during the sample period