The economic value of predictability in portfolio management

Andrea Buraschi and Andrea Carnelli

Journal of Financial Management, Markets and Institutions, 2013, issue 1, 5-22

Abstract: This paper evaluates the evidence on return predictability from an economic perspective: it asks whether investors would have been able and willing to exploit dividend price signals in order to allocate capital efficiently. We use a simple model that incorporates a time varying investment opportunity set into a mean-variance portfolio maximization framework, and derive the optimal capital allocation weights for: (i) a naive strategy based on average realized returns; and (ii) a class of strategies that condition on dividend-price signals. While our data supports in-sample evidence of return predictability, the out-of-sample returns of the naive strategy are higher than those of all conditional portfolio specifications based on a certainty equivalent metric and portfolio turnover. The degree of underperformance is most dramatic in the last three decades: an investor who had used dividend-price ratios as signals for capital allocation in the period 1990-2012 would have consistently generated lower returns than by following a naive strategy. These results suggest that dividend-price predictability offers no economic value to investors.

Keywords: Equity Premium; Stock Returns; Dividend Yield; Out-of-Sample Prediction; Portfolio Choice (JEL Codes: G11; G14; G17) (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.rivisteweb.it/download/article/10.12831/73630 (application/pdf)
https://www.rivisteweb.it/doi/10.12831/73630 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mul:jdp901:doi:10.12831/73630:y:2013:i:1:p:5-22

Access Statistics for this article

More articles in Journal of Financial Management, Markets and Institutions from Società editrice il Mulino
Bibliographic data for series maintained by ().