Performance Evaluation of Zero Net-Investment Strategies

42 Pages Posted: 20 Jun 2011  

Oscar Jorda

University of California, Davis - Department of Economics; Federal Reserve Banks - Federal Reserve Bank of San Francisco

Alan M. Taylor

University of California, Davis - Department of Economics; University of Virginia - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: June 2011

Abstract

This paper introduces new nonparametric statistical methods to evaluate zero-cost investment strategies. We focus on directional trading strategies, risk-adjusted returns, and the investor's decisions under uncertainty as the core of our analysis. By relying on classification tools with a long tradition in the sciences and biostatistics, we can provide a tighter connection between model-based risk characteristics and the no-arbitrage conditions for market efficiency. Moreover, we extend the methods to multicategorical settings, such as when the investor can sometimes take a neutral position. A variety of inferential procedures are provided, many of which are illustrated with applications to excess equity returns and to currency carry trades.

Suggested Citation

Jorda, Oscar and Taylor, Alan M., Performance Evaluation of Zero Net-Investment Strategies (June 2011). NBER Working Paper No. w17150. Available at SSRN: https://ssrn.com/abstract=1866109

Oscar Jorda (Contact Author)

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
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HOME PAGE: http://old.econ.ucdavis.edu/faculty/jorda/

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
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HOME PAGE: http://www.frbsf.org/economic-research/economists/oscar-jorda/

Alan M. Taylor

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
530-752-1572 (Phone)
530-752-9382 (Fax)

HOME PAGE: http://www.econ.ucdavis.edu/faculty/amtaylor/

University of Virginia - Department of Economics ( email )

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Charlottesville, VA 22904-4182
United States
(434)-924-3177 (Phone)
(434)-982-2904 (Fax)

HOME PAGE: http://people.virginia.edu/~amt7u

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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United Kingdom

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