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Home | Events Archive | How to Bet on Winners and Losers
Seminar

How to Bet on Winners and Losers

  • Location
    Erasmus University Rotterdam, Campus Woudestein, ET-14
    Rotterdam
  • Date and time

    April 24, 2025
    12:00 - 13:00

Abstract

We study the construction of long-short portfolios on the basis of cross-sectional return predictions. We derive an optimal portfolio construction procedure that takes the form of a return classification rule. Selecting stocks on the basis of expected return predictions, the standard practice in the literature, is also optimal in special cases of the general framework.

An empirical application to US stocks highlights that the portfolios constructed using the proposed procedure outperform portfolios constructed using the standard tools in the literature, and the outperformance persists when transaction costs are duly accounted for.