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https://ssrn.com/abstract=1572526
 
 

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


Victor DeMiguel


London Business School - Department of Management Science and Operations

Francisco J. Nogales


Universidad Carlos III de Madrid - Department of Statistics; Institute of Financial Big Data UC3M-BS

Raman Uppal


EDHEC Business School; Centre for Economic Policy Research (CEPR)

April 22, 2013

AFA 2011 Denver Meetings Paper

Abstract:     
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.

Number of Pages in PDF File: 71

JEL Classification: G11


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Date posted: March 17, 2010 ; Last revised: November 14, 2013

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

Contact Information

Victor DeMiguel (Contact Author)
London Business School - Department of Management Science and Operations ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Francisco J. Nogales
Universidad Carlos III de Madrid - Department of Statistics ( email )
Avda. de la Universidad, 30
Leganes, Madrid 28911
Spain
+34 916248773 (Phone)
HOME PAGE: http://www.est.uc3m.es/Nogales
Institute of Financial Big Data UC3M-BS ( email )
CL. de Madrid 126
Madrid, Madrid 28903
Spain
Raman Uppal
EDHEC Business School ( email )
58 rue du Port
Lille, 59046
France
Centre for Economic Policy Research (CEPR)
90-98 Goswell Road
London, EC1V 7RR
United Kingdom
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