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Predicting Relative Returns

Valentin Haddad, Serhiy Kozak and Shrihari Santosh

No 23886, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Across a variety of asset classes, we show that relative returns are highly predictable in the time series in and out of sample, much more so than aggregate returns. For Treasuries, slope is more predictable than level. For equities, dominant principal components of anomaly long-short strategies are more predictable than the market. For foreign exchange, a carry portfolio is more predictable than a basket of all currencies against the dollar. We show the commonly used practice to predict each individual asset is often equivalent to predicting only their first principal component, the index, which obscures the predictability of relative returns. Our findings highlight that focusing on important dimensions of the cross-section allows one to uncover additional economically relevant and statistically robust patterns of predictability.

JEL-codes: F31 F65 G0 G1 G12 G17 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-fmk
Note: AP IFM
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