Profitable Predictability in the Cross Section of Stock Returns

Abstract

Haugen and Baker (1996) report that a long-short stock selection strategy based on more than 50 measures of accounting information and past return behavior would have generated excess returns of approximately 3% per month. We find that the Haugen and Baker strategies do not provide attractive returns after transaction costs if an investor already has access to strategy portfolios based on book-to-market and momentum. We also provide an extensive analysis of transaction costs over a long sample and we report results of independent interest to researchers in market microstructure.

Keywords: transaction costs, trading strategy, abnormal return

JEL Classification: G14