Optimal rebalancing period and optimal size for market neutral portfolios.

摘要

The first part of the research uses contemporary data (CRSP and COMPUSTAT data from 1989–2000) to test the validity of the 3-factor model as presented in Fama-French (1996). The performances of three different market neutral (long/short equity) trading strategies are examined. I investigate whether the behavior of returns on factors, price momentum and earnings momentum portfolios can be explained by factors related to size and book-to-market.; In the second study, the trading strategy that provides the best performance is chosen to determine the optimal portfolios rebalancing period and the optimal portfolio size. In this case, further tests on the market neutral (long/short equity) portfolio in the price momentum strategy are performed. In additional to the transaction cost for institutional ownership, return on the short-sale portfolio is further adjusted by using the technique expressed in Alexander (1993). The final study compares the effects of the trading mechanism on the selection of the winner and loser portfolios in the formation period. 2-year transaction data from July 1997 to June 1999 are used in this study.; Transaction costs play a role in determining the optimal holding period for the portfolios. Optimal holding periods for the long, short and market neutral (long/short equity) portfolios changes as transaction costs are included. The optimal holding period(s) ranges from six to nine months depending upon the type of portfolios being considered. Optimal efficiency occurs somewhere between 20–80 securities in the portfolios, and loss of efficiency with more than 100 securities in the portfolios. The adjusted short and market neutral portfolios' returns exhibit similar graphical patterns as the ones in original short and market neutral portfolios. However, these adjusted portfolio returns are amplified.; The evidence in the final study suggests that Open-to-Open portfolios have higher average returns, greater dispersion of average returns and smaller average market capitalization than the Close-to-Close portfolios. It is found that the market neutral portfolio's return under the Trade Price Method is between 200–300 basis points higher than the portfolio's return under the Bid-Ask Price Method; but the timing of the trade execution does not affect the average monthly portfolio returns significantly. Firms in the loser portfolios have a wider spread. The range of the average quote spreads and that of the effective spreads are wider for the loser portfolio. These results can be interpreted as being consistent with the components of the bid-ask spread suggested by Benston and Hagerman (1974) and Glosten (1987).