The Economic Gains from Predicting Returns of Multiple Assets

38 Pages Posted: 17 Jan 2011 Last revised: 12 Feb 2013

See all articles by Laurent Barras

Laurent Barras

McGill University - Desautels Faculty of Management

Date Written: January 31, 2013

Abstract

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

Barras, Laurent, The Economic Gains from Predicting Returns of Multiple Assets (January 31, 2013). Available at SSRN: https://ssrn.com/abstract=1740503 or http://dx.doi.org/10.2139/ssrn.1740503

Laurent Barras (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
+15143988862 (Phone)

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