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Exploiting Predictability in International Anomalies


  • Devraj Basu

    () (Cass Business School)

  • Chi-Hsiou Hung

    () (Durham Business School)

  • Alexander Stremme

    () (Warwick Business School)


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.

Suggested Citation

  • Devraj Basu & Chi-Hsiou Hung & Alexander Stremme, 2007. "Exploiting Predictability in International Anomalies," Working Papers 2007_03, Durham University Business School.
  • Handle: RePEc:dur:durham:2007_03

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    References listed on IDEAS

    1. Tarun Chordia & Lakshmanan Shivakumar, 2002. "Momentum, Business Cycle, and Time-varying Expected Returns," Journal of Finance, American Finance Association, vol. 57(2), pages 985-1019, April.
    2. Ferson, Wayne E & Schadt, Rudi W, 1996. " Measuring Fund Strategy and Performance in Changing Economic Conditions," Journal of Finance, American Finance Association, vol. 51(2), pages 425-461, June.
    3. Ferson, Wayne E & Harvey, Campbell R, 1993. "The Risk and Predictability of International Equity Returns," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 527-566.
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets


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