Return forecasts and optimal portfolio construction: a quantile regression approach

In finance there is growing interest in quantile regression with the particular focus on value at risk and copula models. In this paper, we first present a general interpretation of quantile regression in the context of financial markets. We then explore the full distributional impact of factors on returns of securities and find that factor effects vary substantially across quantiles of returns. Utilizing distributional information from quantile regression models, we propose two general methods for return forecasting and portfolio construction. We show that under mild conditions these new methods provide more accurate forecasts and potentially higher value-added portfolios than the classical conditional mean method.