Stock return serial dependence and out-of-sample portfolio
Journal
Review of Financial Studies
Subject
Management Science and Operations
Publishing details
Authors / Editors
DeMiguel V;Nogales F J;Uppal R
Biographies
Publication Year
2014
Abstract
We study whether investors can exploit serial dependence in stock returns to improve out-of-sample portfolio performance. We show that a vector-autoregressive (VAR) model captures stock return serial dependence in a statistically significant manner. Analytically, we demonstrate that, unlike contrarian and momentum portfolios, an arbitrage portfolio based on the VAR model attains positive expected returns regardless of the sign of asset return cross-covariances and autocovariances. Empirically, we show, however, that both the arbitrage and mean-variance portfolios based on the VAR model outperform the traditional unconditional portfolios only for transaction costs below ten basis points.
Available on ECCH
No
