Do Business Cycles Exhibit Beneficial Information for Portfolio Management? An Empirical Application of Statistical Arbitrage
Do Business Cycles Exhibit Beneficial Information for Portfolio Management? An Empirical Application of Statistical Arbitrage
Author(s): Klaus GrobysSubject(s): Economy, Financial Markets
Published by: EDITURA ASE
Keywords: Statistical arbitrage; optimization procedure; business cycle; cointegration; market timing;
Summary/Abstract: An advantageous statistical arbitrage strategy should exhibit a zero-cost trading strategy for which the expected payoff should be positive. In practical applications, however, the abnormal returns often are out-of-sample not significant. The statistical model being suggested here results in an estimated portfolio exhibiting in-sample a cointegration relationship with the artificial stock index. The portfolio returns exhibited out-of-sample a mean of 10.44% p.a., whereas the volatility was one third lower in comparison to the benchmark's volatility. Accounting for trading costs of 2.94% p.a. on average, the annual returns of the estimated portfolio are out-of-sample still 6.83% higher than the market returns. As a result, the model involves implicitly advantageous market timing.
Journal: The Review of Finance and Banking
- Issue Year: 2/2010
- Issue No: 1
- Page Range: 41-56
- Page Count: 16
- Language: English