Essays In Market Efficiency And Empirical Asset Pricing

This dissertation consists of two chapters that address question about market efficiency in asset pricing. In the first chapter, ``Comovement in Arbitrage Limits , I document that estimates of mispricing, such as deviations from no-arbitrage relations, strongly comove across five financial markets. In particular, I find that one common component---the arbitrage gap---explains the majority of variability in mispricing estimates for futures, Treasury securities, foreign exchange, and options. Prominent equity anomalies also comove significantly with the arbitrage gap. Existing theories propose that funding constraints faced by arbitrageurs can impair market efficiency. Consistent with these theories, I find that variables affecting arbitrage capital availability, such as the TED spread and hedge-fund flows and returns, explain two-thirds of the arbitrage gap’s variation. During periods of tighter capital constraints, the comovement in mispricings becomes stronger. In the second chapter, ``Size and Value in China, joint with Robert F. Stambaugh and Yu Yuan, we construct size and value factors in China. The size factor excludes the smallest 30\% of firms, which are companies valued significantly as potential shells in reverse mergers that circumvent tight IPO constraints. The value factor is based on the earnings-price ratio, which subsumes the book-to-market ratio in capturing all Chinese value effects. Our three-factor model strongly dominates a model formed by just replicating the Fama and French (1993) procedure in China. Unlike that model, which leaves a 17\% annual alpha on the earnings-price factor, our model explains most reported Chinese anomalies, including profitability and volatility anomalies