Exploiting Predictability in International Anomalies

27 Pages Posted: 5 Mar 2007

See all articles by Devraj Basu

Devraj Basu

SKEMA Business School - Lille Campus

Chi-Hsiou Daniel Hung

University of Glasgow - Adam Smith Business School

Alexander Stremme

University of Warwick - Finance Group

Date Written: April 2007

Abstract

We construct unconditionally efficient asset allocation strategies that exploit return predictability of international size and momentum portfolios. The strategies achieve comparable returns to these investment assets while exhibiting much lower volatility. They largely avoid major losses by successfully timing these assets. The strategies utilizing the MSCI world index and the term spread as predictive variables achieve better performance than those without exploiting return predictability. The optimal strategies perform better than conditionally efficient strategies due the conservative response of the optimal portfolio weight to extreme realizations of the predictive variables, thus leading to lower volatility.

Keywords: Asset Pricing, Return Predictability, International Diversification

JEL Classification: G11, G12, G15

Suggested Citation

Basu, Devraj and Hung, Chi-Hsiou Daniel and Stremme, Alexander, Exploiting Predictability in International Anomalies (April 2007). WBS Finance Group Research Paper No. 76, Available at SSRN: https://ssrn.com/abstract=967409 or http://dx.doi.org/10.2139/ssrn.967409

Devraj Basu

SKEMA Business School - Lille Campus ( email )

Avenue Willy Brandt, Euralille
Lille, 59777
France

Chi-Hsiou Daniel Hung

University of Glasgow - Adam Smith Business School ( email )

Gilbert Scott Building
University of Glasgow
Glasgow, Scotland G12 8QQ
United Kingdom

Alexander Stremme (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain
+44 (0) 2476 - 522 066 (Phone)
+44 (0) 2476 - 523 779 (Fax)

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