TY - JOUR
T1 - The economic significance of the cross-sectional autoregressive model
T2 - Further analysis
AU - Levy, Haim
AU - Chew Lim, Kok Chew
PY - 1998
Y1 - 1998
N2 - 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.
AB - 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.
KW - Autocorrelations in stock returns
KW - Economic significance
KW - Transaction costs
UR - http://www.scopus.com/inward/record.url?scp=54749125073&partnerID=8YFLogxK
U2 - 10.1023/A:1008284208744
DO - 10.1023/A:1008284208744
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AN - SCOPUS:54749125073
SN - 0924-865X
VL - 11
SP - 37
EP - 51
JO - Review of Quantitative Finance and Accounting
JF - Review of Quantitative Finance and Accounting
IS - 1
ER -