1. Department of Economics, University of Alberta, Edmonton, AB, Canada T6G 2H4;2. Department of Finance, San Diego State University, 5500 Campanile Drive, San Diego, CA 92182, United States
Abstract:
The paper examines the relative importance of ten anomaly-based trading strategies. We employ Mean Variance spanning methodologies in a classical unconditional setting and a novel conditional setting. Fixed-weight optimal portfolios stemming from the unconditional methodology indicate that all the strategies are needed to enhance the mean–variance tradeoff. This conclusion is completely reversed when we allow for time-varying portfolio weights as a nonlinear function of lagged economic indicators. The overall results suggest that diversified anomaly-based holdings are of limited benefit to sophisticated investors who employ dynamic trading strategies.