Any Role for Mean Reversion in Short Term Asset Allocation?

37 Pages Posted: 17 Feb 2009

See all articles by Massimiliano Caporin

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Frans de Roon

Tilburg University - Department of Finance

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Ca Foscari University of Venice

Date Written: February, 15 2009

Abstract

This paper investigates whether improving the estimation of the expected returns from simple historical moments to the use of predictable variables, mean reversion or both, mean-variance optimal portfolio strategies are able to perform statistically better than the 1/N portfolio. Our analysis shows that, even for the short term horizon, exploiting the mean reversion and predictability feature present in some of the datasets allow mean variance strategies to perform statistically better than the 1/N strategy.

Keywords: mean reversion, strategy preference, 1/N, predictability, testing Sharpe equivalence

JEL Classification: G11

Suggested Citation

Caporin, Massimiliano and de Roon, Frans A. and Pelizzon, Loriana, Any Role for Mean Reversion in Short Term Asset Allocation? (February, 15 2009). Available at SSRN: https://ssrn.com/abstract=1343705 or http://dx.doi.org/10.2139/ssrn.1343705

Massimiliano Caporin (Contact Author)

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

Frans A. De Roon

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 1 3466 8361/3025 (Phone)
+31 1 3466 2875 (Fax)

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

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