Lost in Translation: How Predictability Turns Into Performance

Type and Duration

FFF-Förderprojekt, January 2025 until May 2025

Coordinator

Financial Economics

Main Research

Wealth Management

Description

Modern Portfolio Theory outlines a two-step wealth allocation process, yet accurately predicting asset returns and utilizing those predictions effectively remains a challenge. This difficulty stems from a weak link between forecast accuracy and economic value, a topic of debate among researchers. While some researchers question whether returns are predictable at all, others aim to enhance prediction methods by inter alia borrowing techniques from the realm of machine learning. Our study addresses the gap in how to systematically use predictability for better economic outcomes, exploring various investment strategies and assets. By linking return predictability directly to economic performance, we challenge the focus on statistical significance over economic relevance. Our findings suggest that even slight predictability, when strategically applied, can yield substantial economic benefits.

Practical Application

Apart from implementing a completely novel approach for measuring and evaluating the accuracy and quality of stock return predictions, the project has a direct impact on the asset management industry in general and that of Liechtenstein in particular. The insights gained from the research project allow, for example, asset managers in Liechtenstein to innovate and improve the services and products they offer. More precisely, a better understanding of how predictability translates into economic performance could result in new investment strategies, advancements in practical portfolio management, more personalized investment solutions as well as improved advisory services.

Reference to Liechtenstein

In 2022, roughly 8600 customers had their combined wealth of CHF 54.2 bn managed by one of the 94 asset managers active in Liechtenstein, which highlights the significance of the asset management industry for the economy of Liechtenstein1. These numbers in combination with the project`s potential to innovate products and services, indicate how by enhancing the asset management industry's offerings, the project directly supports wealth creation, financial security, and the prosperity of society at large.

Keywords

Portfolio Optimisation