Factors Affecting the Implementability of Stock Market Trading Strategies

48 Pages Posted: 14 Apr 2003

See all articles by Brian J. Bushee

Brian J. Bushee

University of Pennsylvania - The Wharton School

Jana Smith Raedy

University of North Carolina at Chapel Hill

Date Written: April 2005

Abstract

A substantial body of academic literature provides evidence of stock market trading strategies that generate appreciable abnormal returns. However, there are a number of factors that could partially or fully mitigate the ability of market participants to implement these trading strategies, such as price pressure, restrictions against short sales, and incentives to hold no more than 5% ownership in a firm. We investigate the extent to which these factors account for the evidence of abnormal returns found in seven trading strategies documented in prior research. We find that the size and return reversal trading strategies do not perform well in the presence of the various constraints, whereas the cash flow-to-price, return momentum, post-earnings announcement drift, and operating accrual strategies generally continue to generate significant positive abnormal returns. We find that the book-to-market strategy generates significant positive abnormal returns in about 50% of the scenarios we examine. We find that all of the strategies generate positive abnormal returns in the presence of the restriction against short sales, but that price impact adjustments and constraints on holding more than a 5% stake in any portfolio firm each have a large negative effect on portfolio returns. We also find that equally-weighted portfolio allocations generally perform better than value-weighted allocations and funds with a greater number of stocks and/or lower initial market capitalization also generally produce higher returns. Finally, we find that portfolios that engage in short positions perform worse than long-only portfolios due primarily to the sustained increase in stock prices during the sample period.

Keywords: stock market trading strategies, portfolio implementability, market efficiency

JEL Classification: G11, G14, M41

Suggested Citation

Bushee, Brian J. and Smith Raedy, Jana, Factors Affecting the Implementability of Stock Market Trading Strategies (April 2005). Available at SSRN: https://ssrn.com/abstract=384500 or http://dx.doi.org/10.2139/ssrn.384500

Brian J. Bushee (Contact Author)

University of Pennsylvania - The Wharton School ( email )

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Jana Smith Raedy

University of North Carolina at Chapel Hill ( email )

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Chapel Hill, NC 27599-3490
United States
919-962-7475 (Phone)
919-962-4727 (Fax)

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