71 Pages Posted: 17 Mar 2010 Last revised: 14 Nov 2013
Date Written: April 22, 2013
We study whether investors can exploit serial dependence in stock returns to improve out-of-sample portfolio performance. We show that a vector-autoregressive (VAR) model captures stock return serial dependence in a statistically significant manner. Analytically, we demonstrate that, unlike contrarian and momentum portfolios, an arbitrage portfolio based on the VAR model attains positive expected returns regardless of the sign of asset return cross-covariances and autocovariances. Empirically, we show, however, that both the arbitrage and mean-variance portfolios based on the VAR model outperform the traditional unconditional portfolios only for transaction costs below ten basis points.
JEL Classification: G11
Suggested Citation: Suggested Citation
DeMiguel, Victor and Nogales, Francisco J. and Uppal , Raman, Stock Return Serial Dependence and Out-of-Sample Portfolio Performance (April 22, 2013). AFA 2011 Denver Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1572526 or http://dx.doi.org/10.2139/ssrn.1572526
By Kewei Hou
By Lin Peng