Title

Testing Market Efficiency Using Statistical Arbitrage with Applications to Momentum and Value Strategies

Publication Type

Journal Article

Version

Postprint

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