How to Bet on Winners and Losers
-
Series
-
Speaker(s)André B.M. Souza (ESADE Business School, Spain)
-
FieldEconometrics, Operations Analytics, Data Science and Econometrics
-
LocationErasmus 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.