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Do Business Cycles Exhibit Beneficial Information for Portfolio Management? An Empirical Application of Statistical Arbitrage

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  • Klaus Grobys

    (Academia de Studii Economice / Facultatea de Finante, Asigurari, Banci si Burse de Valori)

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.

Suggested Citation

  • Klaus Grobys, 2010. "Do Business Cycles Exhibit Beneficial Information for Portfolio Management? An Empirical Application of Statistical Arbitrage," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 2(1), pages 041-056, June.
    • Handle: RePEc:rfb:journl:v:02:y:2010:i:1:p:041-056
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    Cited by:

    1. Klaus Grobys, 2012. "Active PortofolioManagement in the Presence of Regime Switching: What Are the Benefits of Defensive Asset Allocation Strategies If the Investor Faces Bear Markets?," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 4(1), pages 015-031, June.

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