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

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  • Levy, Haim
  • Lim, Kok Chew

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 percent. For the post-May 1 1975 period, we use a one-way transaction cost of 0.25 percent. 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 percent 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. Copyright 1998 by Kluwer Academic Publishers

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  • Levy, Haim & Lim, Kok Chew, 1998. "The Economic Significance of the Cross-Sectional Autoregressive Model: Further Analysis," Review of Quantitative Finance and Accounting, Springer, vol. 11(1), pages 37-51, July.
    • Handle: RePEc:kap:rqfnac:v:11:y:1998:i:1:p:37-51
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    Cited by:

    1. Pandey, Dharen Kumar & Lucey, Brian M. & Kumar, Satish, 2023. "Border disputes, conflicts, war, and financial markets research: A systematic review," Research in International Business and Finance, Elsevier, vol. 65(C).

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