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- Title
DO BUSINESS CYCLES EXHIBIT BENEFICIAL INFORMATION FOR PORTFOLIO MANAGEMENT? AN EMPIRICAL APPLICATION OF STATISTICAL ARBITRAGE.
- Authors
Grobys, Klaus
- 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.
- Subjects
BUSINESS cycles; PORTFOLIO management (Investments); PAIRS trading; MARKET volatility; INDUSTRIAL costs
- Publication
Review of Finance & Banking, 2010, Vol 2, Issue 1, p41
- ISSN
2067-2713
- Publication type
Article