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Managing the Market Portfolio

Author

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  • Fabian Hollstein

    (School of Human and Business Sciences, Saarland University, Saarbruecken 66123, Germany)

  • Marcel Prokopczuk

    (School of Economics and Management, Leibniz University Hannover, 30167 Hannover, Germany; International Capital Market Association Centre, Henley Business School, University of Reading, Reading RG6 6BA, United Kingdom)

Abstract

We analyze the relation between time-series predictability and factor investing. We use a large set of financial, macroeconomic, and technical variables to time-series-manage the market portfolio. A combination of the out-of-sample market excess return forecasts of all variables yields a managed market portfolio that generates alphas relative to cross-sectional factor models that exceed 5% per annum. More broadly, the relation between time-series evaluation measures and (multifactor) alphas is weakly positive but complex. The variables’ predictability for future returns is more important than that for volatility. Finally, we document that managed market portfolios based on lagged factor realizations also perform well.

Suggested Citation

  • Fabian Hollstein & Marcel Prokopczuk, 2023. "Managing the Market Portfolio," Management Science, INFORMS, vol. 69(6), pages 3675-3696, June.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:6:p:3675-3696
    DOI: 10.1287/mnsc.2022.4459
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