Abnormal Returns in Equity Markets: Evidence from a Dynamic Indexing Strategy

30 Pages Posted: 2 Apr 2003

See all articles by Carol Alexander

Carol Alexander

University of Sussex Business School; Peking University HSBC Business School

Anca Dimitriu

University of Reading - ISMA Centre

Date Written: January 20, 2003

Abstract

This paper investigates the abnormal return generated through a dynamic equity indexing strategy and the extent to which this can be considered evidence against the efficient markets hypothesis. We introduce a new measure of stock price dispersion and show that it is a leading indicator for the abnormal return, where their relationship is based on a switching process of two market regimes. The entire abnormal return is associated with only one of the regimes and this is the prevalent regime during the last few years. The predictive power of the model is demonstrated over different time horizons and in different, real world and simulated stock markets. The strategy remains profitable even after introducing transaction costs, thus proving evidence of temporary market inefficiencies.

Keywords: index tracking, cointegration, Markov switching, dispersion, equity markets, long-run equilibrium prices

JEL Classification: C23, C51, G11, G23

Suggested Citation

Alexander, Carol and Dimitriu, Anca, Abnormal Returns in Equity Markets: Evidence from a Dynamic Indexing Strategy (January 20, 2003). Available at SSRN: https://ssrn.com/abstract=371660 or http://dx.doi.org/10.2139/ssrn.371660

Carol Alexander (Contact Author)

University of Sussex Business School ( email )

Falmer, Brighton BN1 9SL
United Kingdom

HOME PAGE: http://www.coalexander.com

Peking University HSBC Business School ( email )

Anca Dimitriu

University of Reading - ISMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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