An Examination of Average Returns, Dispersion of Average Returns, and Bid-Ask Quotes

Abstract

This study supports the notion put forth by Jacobs and Levy [1996] that, balancing equal dollar amounts, long and short takes full advantage of the spread of returns. Long/short equity strategy generates positive returns in 11 out of 13 cases, while negative returns appear in either the long or the short strategy in 9 out of 12 cases. The long/short portfolios' return using the trade price method is between 200-300 basis points higher than the portfolio using the bid-ask price method; the timing of the trade execution does not affect the average monthly portfolio returns significantly. The short portfolio is smaller in size, and its average quote spreads and average effective spreads are greater and show wider dispersion than those of the long portfolio.