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Return distribution predictability and its implications for portfolio selection

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  • Zhu, Min
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    Abstract

    The inquiries to return predictability are traditionally limited to conditional mean, while literature on portfolio selection is replete with moment-based analysis with up to the fourth moment being considered. This paper develops a distribution-based framework for both return prediction and portfolio selection. More specifically, a time-varying return distribution is modeled through quantile regressions and copulas, using quantile regressions to extract information in marginal distributions and copulas to capture dependence structure. A preference function which captures higher moments is proposed for portfolio selection. An empirical application highlights the additional information provided by the distributional approach which cannot be captured by the traditional moment-based methods.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Economics & Finance.

    Volume (Year): 27 (2013)
    Issue (Month): C ()
    Pages: 209-223

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    Handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:209-223

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    Web page: http://www.elsevier.com/locate/inca/620165

    Related research

    Keywords: Return predictability; Quantile regression; Copula; Portfolio selection;

    References

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    Cited by:
    1. Corredor, Pilar & Ferrer, Elena & Santamaria, Rafael, 2013. "Investor sentiment effect in stock markets: Stock characteristics or country-specific factors?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 572-591.

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