Victor DeMiguel, Raman Uppal, Francisco J. Nogales: The authors study whether investors can exploit stock return serial dependence to improve out-ofsample portfolio performance.
London Business School
Universidad Carlos III
EDHEC Business School
To do this, they first show that a vector-autoregressive (VAR) model estimated with ridge regression captures daily stock return serial dependence in a stable manner. Second, they characterize (analytically and empirically) expected returns of VAR-based arbitrage portfolios, and show that they compare favorably to those of existing arbitrage portfolios. Third, they evaluate the performance of VAR-based investment (positive-cost) portfolios. They show that, subject to a suitable norm constraint, these portfolios outperform the traditional (unconditional) portfolios for transaction costs below 10 basis points.
|Research Cluster :||Finance|