Return Prediction Models and Portfolio Optimization: Evidence for Industry Portfolios

62 Pages Posted: 3 Dec 2014 Last revised: 15 Oct 2018

See all articles by Wolfgang Bessler

Wolfgang Bessler

Justus-Liebig-University Giessen

Dominik Wolff

Darmstadt University of Technology; Institute for quantitative Capital Market research at Deka Bank (IQ-KAP); Deka Investment GmbH; Frankfurt University of Applied Sciences

Date Written: January 15, 2016

Abstract

We postulate that utilizing return prediction models with fundamental, macroeconomic, and technical indicators instead of using historical averages should result in superior asset allocation decisions. We investigate the predictive power of individual variables for forecasting industry returns in-sample and out-of-sample and then analyze multivariate predictive regression models including OLS, a regularization technique, principal components, a target-relevant latent factor approach, and forecast combinations. The gains from using industry return predictions are evaluated in an out-of-sample Black-Litterman portfolio optimization framework. We provide empirical evidence that portfolio optimization utilizing industry return prediction models significantly outperform portfolios using historical averages and those being passively managed.

Keywords: Portfolio Optimization, Return forecasts, Predictive Regression, Three-Pass Regression Filter, Black-Litterman Model

JEL Classification: G17, G11, C53

Suggested Citation

Bessler, Wolfgang and Wolff, Dominik, Return Prediction Models and Portfolio Optimization: Evidence for Industry Portfolios (January 15, 2016). Available at SSRN: https://ssrn.com/abstract=2532906 or http://dx.doi.org/10.2139/ssrn.2532906

Wolfgang Bessler (Contact Author)

Justus-Liebig-University Giessen ( email )

Center for Finance and Banking
Licher Strasse 74
Giessen, D-35394
Germany
49-641-9922460 (Phone)
49-641-9922469 (Fax)

HOME PAGE: http://wiwi.uni-giessen.de/home/Bessler/

Dominik Wolff

Darmstadt University of Technology

Hochschulstraße 1
S1|02 40
Darmstadt, Hessen D-64289
Germany

Institute for quantitative Capital Market research at Deka Bank (IQ-KAP) ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325
Germany

HOME PAGE: http://www.iq-kap.de/en

Deka Investment GmbH ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325
Germany

Frankfurt University of Applied Sciences ( email )

Nibelungenplatz 1
Frankfurt / Main, 60318
Germany

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