Cross-Sectional Long-Short Strategies on the S&P 500: Signals, Weighting, and Costs

Abstract

The paper explores a basic long-short equity strategy on the S&P 500 securities. The central issue is how effective are the past-return signals over the volatility-based ones considering the transaction costs. There were 503 S&P 500 stocks and the monthly closing prices were gathered starting December 1999 to July 2026. Five signals of ranking are discussed, which are one-month return, six-month return, twelve-month return, return-volatility and volatility-scaled momentum. Each of the signals is implemented using two portfolio rules, decile portfolio and rank weighted portfolio. Monthly rebalancing is done at a one-way transaction cost of 25 basis points. The findings indicate that return volatility is the most important signal in this sample. Volatility decile strategy has the highest net annualized return, and rank-weighted volatility strategy has the least turnover and minimum drawdown. If costs are taken into account, the strategies based on past-returns do not work. This strategy, in terms of volatility, has a relatively large beta as well indicating that some portion of its return can be explained by the market exposure. This should be factored in when evaluating the performance of the strategy.