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Long-Short Portfolio

Author

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  • Leo Schubert

    (Constance University of Applied Sciences, Germany.)

Abstract

ELong-short strategies are one of the most successful tools, applied by hedge funds manager. One under-evaluated stock is bought (long position) and an over-evaluated stock is sold (short position) at the same time. After a short term, when the values of the stocks are as expected, profit can be realized by a closing transaction. The possibility to find first obvious over- and under-evaluated stocks depends on the number of participants in this markets. While the hedge funds strategies become more popular, the chance to achieve profit by this strategies is shrinking. Therefore two models to generate long-short portfolios are proposed. By this approaches a portfolio A for the long- and a portfolio B for the short position were computed. The difference of the values of A and B is designed to oscillate from negative to positive and reverse. This behavior of oscillating or mean reverting stock prices was stated by e.g. E. Fama and K. R. French (1988). Mean reversion of portfolios can offer the possibility of statistical arbitrage. The proposed linear models were tested by stocks of the Tokyo stock exchange. The results seem to be applicable and show an additional advantage of low systematic risk.

Suggested Citation

  • Leo Schubert, 2006. "Long-Short Portfolio," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 5, pages 1-11, December.
    • Handle: RePEc:eac:articl:15/05
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    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-273, April.
    2. Auerbach, Alan J. & Hines, James Jr., 2002. "Taxation and economic efficiency," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 21, pages 1347-1421, Elsevier.
    3. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    4. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    5. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
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