Persistent
mispricings should attract profit-seeking investors to exploit them. This, in
turn, should eventually cause the anomaly to disappear. There are several
potential reasons for anomalies to persist.
Misunderstood Mispricings
Certain anomalies may not have a logical explanation, causing
investors to be wary of trying to exploit them.
Costly Arbitrage
Particularly for less liquid securities, there may be significant
costs involved in trading them. The higher the costs, the greater a mispricing
must be in order for arbitrageurs to try to exploit it.
Insufficient Profit
Large investors, in particular, may find that certain mispricings
do not offer a significant return for the time involved in identifying and
exploiting them.
Trading Restrictions
Many investors have limits imposed on their activity, such as a
prohibition on short selling. Such prohibitions can prevent investors from
exploiting opportunities when identified.
