RT Journal Article
SR Electronic
T1 Predicting Market Components Out of Sample:<br/>
               <em>Asset Allocation Implications</em>
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 29
OP 41
DO 10.3905/jpm.2011.37.4.029
VO 37
IS 4
A1 Aiguo Kong
A1 David E. Rapach
A1 Jack K. Strauss
A1 Guofu Zhou
YR 2011
UL https://pm-research.com/content/37/4/29.abstract
AB 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