Abstract

References (40)

Beta

Citations (7)

Beta

Download | Share | Email | Add to Briefcase | Buy Hard Copy

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

Steve Hogan
Credit Suisse First Boston

Robert A. Jarrow
Cornell University - Samuel Curtis Johnson Graduate School of Management

Melvyn Teo
Singapore Management University - School of Business

Mitch Warachka
Singapore Management University - School of Business

April 15, 2003

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 controlling for transaction costs and the influence of small stocks, we find evidence that these strategies generate statistical arbitrage. Furthermore, their profitability does not appear to decline over time.

Keywords: market efficiency, statistical arbitrage, arbitrage, momentum, value

JEL Classifications: G12, G14

Working Paper Series

Date posted: May 25, 2003 ; Last revised: June 11, 2003

Suggested Citation

Jarrow, Robert A., Hogan, Steve, Teo, Melvyn and Warachka, Mitch, Testing Market Efficiency Using Statistical Arbitrage with Applications to Momentum and Value Strategies (April 15, 2003). Available at SSRN: http://ssrn.com/abstract=386440 or doi:10.2139/ssrn.386440

Export to: Export Citation What's this?

Contact Information

Melvyn Teo (Contact Author) Singapore Management University - School of Business ( email ) 469 Bukit Timah Road Singapore S(259756) Singapore +65 6822 0735 (Phone) +65 6822 0777 (Fax)
Steve Hogan Credit Suisse First Boston ( email ) 11 Madison Avenue New York, NY 10010 United States
Robert A. Jarrow Cornell University - Samuel Curtis Johnson Graduate School of Management ( email ) Department of Finance Ithaca, NY 14853 United States 607-255-4729 (Phone) 607-254-4590 (Fax)
Mitch Warachka Singapore Management University - School of Business ( email ) 469 Bukit Timah Road Singapore 912409 Singapore