Publication Type
Journal Article
Version
acceptedVersion
Publication Date
9-2004
Abstract
This paper introduces the concept of statistical arbitrage, a long horizon trading opportunity that generates a riskless profit and is designed to exploit persistent anomalies. Statistical arbitrage circumvents the joint hypothesis dilemma of traditional market efficiency tests because its definition is independent of any equilibrium model and its existence is incompatible with market efficiency. We provide a methodology to test for statistical arbitrage and then empirically investigate whether momentum and value trading strategies constitute statistical arbitrage opportunities. Despite adjusting for transaction costs, the influence of small stocks, margin requirements, liquidity buffers for the marking-to-market of short-sales, and higher borrowing rates, we find evidence that these strategies generate statistical arbitrage.
Keywords
Statistical arbitrage, Market efficiency, Momentum, Value
Discipline
Finance and Financial Management | Portfolio and Security Analysis
Research Areas
Finance
Publication
Journal of Financial Economics
Volume
73
Issue
3
First Page
525
Last Page
565
ISSN
0304-405X
Identifier
10.1016/j.jfineco.2003.10.004
Publisher
Elsevier
Citation
HOGAN, Steve; JARROW, Robert; TEO, Melvyn; and WARACHKA, Mitchell.
Testing Market Efficiency Using Statistical Arbitrage with Applications to Momentum and Value Strategies. (2004). Journal of Financial Economics. 73, (3), 525-565.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/2804
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1016/j.jfineco.2003.10.004