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Do Business Cycles Exhibit Beneficial Information for Portfolio Management? An Empirical Application of Statistical Arbitrage

Klaus Grobys
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Klaus Grobys: Academia de Studii Economice / Facultatea de Finante, Asigurari, Banci si Burse de Valori

The Review of Finance and Banking, 2010, vol. 02, issue 1, pages 041-056

Abstract: An advantageous statistical arbitrage strategy should exhibit a zero-cost trading strategy for which the expected payoff should be positive. In practical applications, however, the abnormal returns often are out-of-sample not significant. The statistical model being suggested here results in an estimated portfolio exhibiting in-sample a cointegration relationship with the artificial stock index. The portfolio returns exhibited out-of-sample a mean of 10.44% p.a., whereas the volatility was one third lower in comparison to the benchmark's volatility. Accounting for trading costs of 2.94% p.a. on average, the annual returns of the estimated portfolio are out-of-sample still 6.83% higher than the market returns. As a result, the model involves implicitly advantageous market timing.

Date: 2010
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The Review of Finance and Banking is currently edited by Victor Dragota; Bogdan Negrea

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