Research and publications
Stock Return Serial Dependence and Out-of-Sample Portfolio Performance
This paper studies whether investors can exploit stock return serial dependence to improve the out-of-sample performance of their portfolios. To do this, it first shows that a vector-autoregressive (VAR) model estimated with ridge regression captures daily stock return serial dependence in a stable manner. Second, it characterizes (analytically and empirically) expected returns of VAR-based arbitrage portfolios, and shows that they compare favorably to those of existing arbitrage portfolios. Third, it evaluates the performance of VAR-based investment (positive-cost) portfolios. The paper shows that, subject to a suitable norm constraint, these portfolios outperform the traditional (unconditional) portfolios for transaction costs below 10 basis points. A revisited version of this paper was published in the Review of Financial Studies, 27.4 (2014).
Author(s):
Victor DeMiguel, Francisco J. Nogales, Raman Uppal
Summary:
This paper studies whether investors can exploit stock return serial dependence to improve the out-of-sample performance of their portfolios. To do this, it first shows that a vector-autoregressive (VAR) model estimated with ridge regression captures daily stock return serial dependence in a stable manner. Second, it characterizes (analytically and empirically) expected returns of VAR-based arbitrage portfolios, and shows that they compare favorably to those of existing arbitrage portfolios. Third, it evaluates the performance of VAR-based investment (positive-cost) portfolios. The paper shows that, subject to a suitable norm constraint, these portfolios outperform the traditional (unconditional) portfolios for transaction costs below 10 basis points. A revisited version of this paper was published in the Review of Financial Studies, 27.4 (2014).
Register to download PDF
Register/Log in| Type : | Working paper |
|---|---|
| Date : | 04/08/2013 |
| Keywords : |
Portfolio Management |
About EDHEC
Operating from campuses in Lille, Nice, Paris, London and Singapore, EDHEC is one of the world’s top 15 business schools. Fully international and directly connected to the business world, EDHEC commands a strong reputation for research excellence and the ability to train entrepreneurs and managers capable of breaking new ground. EDHEC functions as a genuine laboratory of ideas and produces innovative solutions valued by businesses. The School’s teaching is inspired by its research work and a focus on “learning by doing”, all with the aim of equipping people with the skills to succeed in business.
