TY - JOUR T1 - Predicting Market Components Out of Sample:<br/> <em>Asset Allocation Implications</em> JF - The Journal of Portfolio Management SP - 29 LP - 41 DO - 10.3905/jpm.2011.37.4.029 VL - 37 IS - 4 AU - Aiguo Kong AU - David E. Rapach AU - Jack K. Strauss AU - Guofu Zhou Y1 - 2011/07/31 UR - https://pm-research.com/content/37/4/29.abstract N2 - The authors analyze out-of-sample return predictability for components of the aggregate market, focusing on the well-known Fama–French size/value-sorted portfolios. Employing a forecast combination approach based on a variety of economic variables and lagged component returns as predictors, they find significant evidence of out-of-sample return predictability for nearly all component portfolios. Moreover, return predictability is typically much stronger for small-cap/high book-to-market value stocks. The pattern of component return predictability is enhanced during business cycle recessions, linking component return predictability to the real economy. Considering various component-rotation investment strategies, the authors show that out-of-sample component return predictability can be exploited to substantially improve portfolio performance.TOPICS: Portfolio construction, exchanges/markets/clearinghouses, statistical methods ER -