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On Back-Testing "Zero-Investment" Strategies

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  • Alexander, Gordon J

Abstract

"Zero-investment" strategies typically involve forming a long portfolio in one set of securities and a short portfolio in another, with the two identified by the use of some trading rule. When back-testing such strategies, the ex post difference in their abnormal returns represents an unbiased estimate of their economic profitability in perfect markets and thus serves as an indication of market efficiency. However, Regulation T's short-selling constraints are a potentially significant imperfection facing retail and institutional investors. After development of a procedure that recognizes these constraints in measuring returns, the impact of these constraints on economic profitability is analyzed. Copyright 2000 by University of Chicago Press.

Suggested Citation

  • Alexander, Gordon J, 2000. "On Back-Testing "Zero-Investment" Strategies," The Journal of Business, University of Chicago Press, vol. 73(2), pages 255-277, April.
    • Handle: RePEc:ucp:jnlbus:v:73:y:2000:i:2:p:255-77
    DOI: 10.1086/209642
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    Cited by:

    1. Wentworth Boynton & Steven Jordan, 2006. "Will the Smart Institutional Investor Always Drive Prices to Fundamental Value?," Yale School of Management Working Papers amz2357, Yale School of Management, revised 19 Nov 2006.
    2. Yan Xiong & Haiyan Zhou & Sanjay Varshney, 2010. "The economic profitability of pre-IPO earnings management and IPO underperformance," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 34(3), pages 229-256, July.
    3. Markus Glaser & Martin Weber, 2003. "Momentum and Turnover: Evidence from the German Stock Market," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 55(2), pages 108-135, April.
    4. van der Hart, Jaap & Slagter, Erica & van Dijk, Dick, 2003. "Stock selection strategies in emerging markets," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 105-132, February.
    5. Gouriéroux, Christian & Monfort, Alain & Zakoian, Jean-Michel, 2017. "Pseudo-Maximum Likelihood and Lie Groups of Linear Transformations," MPRA Paper 79623, University Library of Munich, Germany.
    6. Jarrow, Robert & Teo, Melvyn & Tse, Yiu Kuen & Warachka, Mitch, 2012. "An improved test for statistical arbitrage," Journal of Financial Markets, Elsevier, vol. 15(1), pages 47-80.

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