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Exploiting Predictability in International Anomalies

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  • Devraj Basu

    ()
    (Cass Business School)

  • Chi-Hsiou Hung

    ()
    (Durham Business School)

  • Alexander Stremme

    ()
    (Warwick Business School)

Abstract

We construct unconditionally efficient asset allocation strategies that ex- ploit return predictability of international size and momentum portfolios. The strategies achieve comparable returns to these investment assets while exhibit- ing much lower volatility. They largely avoid major losses by successfully tim- ing 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.

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Bibliographic Info

Paper provided by Durham University Business School in its series Working Papers with number 2007_03.

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Date of creation: 20 Mar 2007
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Handle: RePEc:dur:durham:2007_03

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Postal: Durham University Business School, Mill Hill Lane, Durham DH1 3LB, England
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Web page: http://www.dur.ac.uk/business
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  1. Ferson, Wayne E & Harvey, Campbell R, 1993. "The Risk and Predictability of International Equity Returns," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 6(3), pages 527-66.
  2. Ferson, Wayne E & Schadt, Rudi W, 1996. " Measuring Fund Strategy and Performance in Changing Economic Conditions," Journal of Finance, American Finance Association, American Finance Association, vol. 51(2), pages 425-61, June.
  3. Tarun Chordia & Lakshmanan Shivakumar, 2002. "Momentum, Business Cycle, and Time-varying Expected Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 57(2), pages 985-1019, 04.
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