Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/162441
Authors: 
Ledoit, Olivier
Wolf, Michael
Zhao, Zhao
Year of Publication: 
2016
Series/Report no.: 
Working Paper 238
Abstract: 
Many researchers seek factors that predict the cross-section of stock returns. The standard methodology sorts stocks according to their factor scores into quantiles and forms a corresponding long-short portfolio. Such a course of action ignores any information on the covariance matrix of stock returns. Historically, it has been difficult to estimate the covariance matrix for a large universe of stocks. We demonstrate that using the recent DCC-NL estimator of Engle et al. (2016) substantially enhances the power of tests for cross-sectional anomalies: On average, "Student" t-statistics more than double.
Subjects: 
Cross-section of returns
dynamic conditional correlations
GARCH
Markowitz portfolio selection
nonlinear shrinkage
JEL: 
C13
C58
G11
Persistent Identifier of the first edition: 
Document Type: 
Working Paper
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