The Economic Gains from Predicting Returns of Multiple Assets
38 Pages Posted: 17 Jan 2011 Last revised: 12 Feb 2013
Date Written: January 31, 2013
This paper determines the economic gains from predicting the returns of multiple assets. I set up a scenario where active investors receive timing or selectivity signals, and compute the economic gains they generate. The results reveal that investors with selectivity skills take more aggressive portfolio decisions, and, therefore, produce significantly larger gains. When predictive signals are persistent, the impact on short-term performance can be positive, in contrast to the single-asset case. In the long-run, however, this impact is always negative. Finally, moderate levels of estimation risk and trading costs -- when considered jointly -- greatly decrease performance. It implies that small levels of predictability do not necessarily produce large economic gains, as previously documented.
Keywords: Factor-Timing, Asset-Selectivity, Forecast Persistence, Estimation Risk, Trading Costs
JEL Classification: G11, G17
Suggested Citation: Suggested Citation