Stock return serial dependence and out-of-sample portfolio

DeMiguel, V and Nogales, F J and Uppal, R (2014) Stock return serial dependence and out-of-sample portfolio. Review of Financial Studies, 27 (4). pp. 1031-1073. ISSN 0893-9454

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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.

Item Type: Article
Subject Areas: Management Science and Operations
DOI: 10.1093/rfs/hhu002
Date Deposited: 02 Mar 2016 18:51
Last Modified: 23 Mar 2016 17:07

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