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Performance Evaluation of Zero Net-Investment Strategies

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  • Òscar Jordà
  • Alan M. Taylor

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

  • Òscar Jordà & Alan M. Taylor, 2011. "Performance Evaluation of Zero Net-Investment Strategies," NBER Working Papers 17150, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:17150
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    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C59 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Other
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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