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

Raman Uppal, Victor DeMiguel and Francisco J. Nogales

No 9456, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP9456 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Stock Return Serial Dependence and Out-of-Sample Portfolio Performance (2014)
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:cpr:ceprdp:9456

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP9456

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().