Stock Return Serial Dependence and Out-of-Sample Portfolio Performance

Raman Uppal, Victor DeMiguel and Francisco J. Nogales

No 9456, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study whether investors can exploit stock return serial dependence to improve out-of- sample portfolio performance. To do this, we first show that a vector-autoregressive (VAR) model estimated with ridge regression captures daily stock return serial dependence in a stable manner. Second, we characterize (analytically and empirically) expected returns of VAR-based arbitrage portfolios, and show that they compare favorably to those of existing arbitrage portfolios. Third, we evaluate the performance of VAR-based investment (positive-cost) portfolios. We show that, subject to a suitable norm constraint, these portfolios outperform the traditional (unconditional) portfolios for transaction costs below 10 basis points.

Keywords: Out-of-sample performance; Portfolio choice; Serial dependence; Vector autoregression (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2013-04
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Journal Article: Stock Return Serial Dependence and Out-of-Sample Portfolio Performance (2014)
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