The Economic Significance of the Cross-Sectional Autoregressive Model: Further Analysis

The Economic Significance of the Cross-Sectional Autoregressive Model: Further Analysis We reexamine whether investors can gain abnormal returns using the cross-sectional autoregressive model of stock returns. We find that the pattern of abnormal returns obtained is inconsistent over the time period 1934–94. We adjust for the higher commission costs in the pre-May 1 1975 period, a point overlooked in Jegadeesh (1990), by assuming a conservative one-way transaction cost of 0.75%. For the post-May 1 1975 period, we use a one-way transaction cost of 0.25%. The results show that investors who invest only on the long side would earn insignificant 'after-transaction cost' abnormal returns in the post-World War II period, 1946–94. The 'after-transaction cost' abnormal return from the short strategy is about 0.5% for the period 1946–94. This article shows that an investor would not earn abnormal returns using this model considering that it is more costly in practice to sell securities short and that most investors would not earn interest on short sale proceeds. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

The Economic Significance of the Cross-Sectional Autoregressive Model: Further Analysis

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 1998 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1008284208744
Publisher site
See Article on Publisher Site

Abstract

We reexamine whether investors can gain abnormal returns using the cross-sectional autoregressive model of stock returns. We find that the pattern of abnormal returns obtained is inconsistent over the time period 1934–94. We adjust for the higher commission costs in the pre-May 1 1975 period, a point overlooked in Jegadeesh (1990), by assuming a conservative one-way transaction cost of 0.75%. For the post-May 1 1975 period, we use a one-way transaction cost of 0.25%. The results show that investors who invest only on the long side would earn insignificant 'after-transaction cost' abnormal returns in the post-World War II period, 1946–94. The 'after-transaction cost' abnormal return from the short strategy is about 0.5% for the period 1946–94. This article shows that an investor would not earn abnormal returns using this model considering that it is more costly in practice to sell securities short and that most investors would not earn interest on short sale proceeds.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 6, 2004

References

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