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Discussion Paper Details

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

Author(s): Victor DeMiguel, Francisco J. Nogales and Raman Uppal

Publication Date: April 2013

Keyword(s): out-of-sample performance, portfolio choice, Serial dependence and vector autoregression

Programme Area(s): Financial Economics

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9456

Bibliographic Reference

DeMiguel, V, Nogales, F and Uppal, R. 2013. 'Stock Return Serial Dependence and Out-of-Sample Portfolio Performance'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9456