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Cross-Sectional and Time-Series Tests of Return Predictability: What Is the Difference?

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper, “Cross-Sectional and Time-Series Tests of Return Predictability: What Is the Difference?” by Amit Goyal and Narasimhan Jegadeesh, delves into a comparative analysis of the performance of time-series (TS) and cross-sectional (CS) strategies grounded in past returns.

With a keen focus on the distinct characteristics of these strategies, the study unveils the nuanced differences between them, shedding light on the essence of zero-net investment long/short strategies in cross-sectional strategies and the time-varying net-long investment in risky assets integral to time-series strategies.

Offering valuable insights into the performance dynamics for individual stocks and multiple international asset classes with diverse return distributions, the research underscores the pivotal role of scaled cross-sectional strategies, which show significant outperformance compared to similarly scaled time-series strategies.

This scholarly inquiry not only enriches our understanding of momentum, market timing, and return predictability but also creates a compelling foundation for in-depth exploration of strategy performance in financial markets.

Abstract Of Paper

We compare the performance of time-series (TS) and cross-sectional (CS) strategies based on past returns. While CS strategies are zero-net investment long/short strategies, TS strategies take on a time-varying net-long investment in risky assets. For individual stocks, the difference between the performances of TS and CS strategies is largely due to this time-varying net-long investment. With multiple international asset classes with heterogeneous return distributions, scaled CS strategies significantly outperform similarly scaled TS strategies.

Original paper – Download PDF

Here you can download the PDF and original paper of Cross-Sectional and Time-Series Tests of Return Predictability: What Is the Difference?.

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Author

Amit Goyal
University of Lausanne; Swiss Finance Institute

Narasimhan Jegadeesh
Emory University – Department of Finance

Conclusion

In conclusion, “Cross-Sectional and Time-Series Tests of Return Predictability: What Is the Difference?” by Amit Goyal and Narasimhan Jegadeesh sheds profound light on the nuanced distinction and performance dynamics between time-series (TS) and cross-sectional (CS) strategies based on past returns.

The elucidation of the time-varying net-long investment in risky assets within TS strategies and the zero-net investment long/short nature of CS strategies unveils a crucial understanding of their respective performances.

Notably, the research uncovers that for individual stocks and across multiple international asset classes with diverse return distributions, scaled CS strategies exhibit a remarkable edge, significantly outperforming similarly scaled TS strategies.

These revelations not only enhance our comprehension of momentum, market timing, and return predictability but also offer invaluable insights into formulating effective strategic approaches in financial markets. This scholarly inquiry lays a formidable foundation for further exploration and refinement of investment strategies, amplifying the depth of our understanding in this domain.

Related Reading:

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FAQ

Q1: What is the primary focus of the research paper, “Cross-Sectional and Time-Series Tests of Return Predictability: What Is the Difference?” by Amit Goyal and Narasimhan Jegadeesh?

A1: The primary focus of the research paper is to compare the performance of time-series (TS) and cross-sectional (CS) strategies based on past returns. The study investigates the nuanced differences between these strategies, particularly emphasizing the zero-net investment long/short nature of cross-sectional strategies and the time-varying net-long investment in risky assets integral to time-series strategies. The research aims to provide insights into the performance dynamics of these strategies for individual stocks and multiple international asset classes with diverse return distributions.

Q2: What distinguishes cross-sectional (CS) strategies from time-series (TS) strategies, and how do these distinctions impact their performances?

A2: Cross-sectional (CS) strategies are zero-net investment long/short strategies, meaning they involve taking simultaneous long and short positions with a net investment of zero. On the other hand, time-series (TS) strategies involve a time-varying net-long investment in risky assets. The key distinction lies in the nature of their investment positions. The study finds that the difference in performance between TS and CS strategies, especially for individual stocks, is largely due to the time-varying net-long investment characteristic of TS strategies. Understanding these distinctions is crucial for comprehending the performance dynamics of these strategies.

Q3: What is the significance of the findings related to the performance of scaled cross-sectional (CS) strategies compared to similarly scaled time-series (TS) strategies?

A3: The research reveals a significant finding related to the performance of scaled cross-sectional (CS) strategies compared to similarly scaled time-series (TS) strategies. Across multiple international asset classes with diverse return distributions, the study demonstrates that scaled CS strategies exhibit significant outperformance when compared to similarly scaled TS strategies. This finding underscores the importance of considering the scaling factor in evaluating the relative performance of different strategies, providing valuable insights for investors and practitioners seeking effective investment approaches.

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