Lack of Liquidity Sucks the Juice from Stock Anomalies?

Does lack of liquidity among stocks in anomaly portfolios effectively block exploitation? In their November 2025 paper entitled “Liquidity Constraints and the Illusion of Anomaly Profitability”, Álvaro Cartea, Mihai Cucuringu, Qi Jin and Jiexiu Zhu assess exploitability of anomaly trading strategies after accounting for individual stock liquidities. They define liquidity of a stock as its capacity to absorb incremental volume relative to recently observed average daily volume without material price impact. They estimate anomaly portfolio profitability based on liquidity-constrained dollar trade sizes/profit for each anomaly portfolio stock. They apply this approach to 128 U.S. stock return anomalies, with both in-sample (same as originally published) and out-of-sample results. They initially assume zero trading costs to isolate the impact of liquidity constraints. They then estimate trading costs (either half the bid-ask spread or price impact estimates), exclude trades expected to be unprofitable and generate the combined effects of liquidity constraints and trading costs. Using data for stocks per the 128 anomalies during January 1930 through December 2023, they find that:

(more…)