The Real-Time Predictability of the Size and Value Premium in Japan

Abstract

This study examines whether the short-term variation in the Japanese size and value premium is sufficiently predictable to be exploited by a timing strategy. In the spirit of Pesaran and Timmermann [J. Finance 50 (1995) 1201], we employ a dynamic modeling approach in which we explicitly allow for permutations among the determinants in order to mitigate typical data-snooping biases. Using a base set of candidate regressors, we perform an in-sample estimation of all economically sensible models. Subsequently, a ''best'' model is determined according to a selection criterion. However, whereas most studies use in-sample model selection criteria, we introduce an out-of-sample training period to select our models. We then implement our strategy in a second-stage out-of-sample period: the trading period. All stages re-occur on a monthly basis via a rolling window framework. The results confirm sufficient predictability under lower transaction cost levels. Under high transaction costs scenarios it is more difficult to obtain incremental benefits. D

Equity style timing using support vector regressions

“…Transaction costs are expected to be relatively low as we are able to buy and sell futures on these indices. 6 Both indices are constructed by dividing the stocks in the S&P 500 index according to just one single attribute: the book-to-market ratio. This procedure splits the S&P 500 index into two, mutually exclusive groups of stocks and is designed to track these accepted investment styles in the U.S. stock market.…”

“…We therefore 5 In the case of for instance the High book-to-market minus Low book-to-market (HML) series of [20], we can expect relatively high transaction costs as portfolios generally exhibit unacceptable liquidity features, particularly in a monthly long/short setting. 6 In practice the maximum exposure of the trading strategy is still restricted by the liquidity features of this future. conclude that pure and unconditional value investing in this particular sample period has not been a very attractive trading strategy.…”

“…1 Levis and Liodakis [28] find moderate evidence in favor of small/large rotation strategies, but less evidence for value/growth rotation in the United Kingdom. Bauer et al [6] find evidence for the profitability of style rotation strategies in Japan, but point out that moderate levels of transaction costs can already make these results less interesting in a practical context. The majority of rotation studies employ technical (or market-based) and (macro-)economic indicators.…”

Equity Premium Predictions with Adaptive Macro Indexes

“…The only exceptions, as far as I know, are Ng (2007a, 2007b) and Emanuel (2006). 8 This paper contributes to the literature with a new application in real-time equity premium predictions.…”

Predicting premiums for the market, size, value, and momentum factors

“…Literature analyzing the predictability of the size, value, or momentum premiums is rare and focused on the related topic of style rotation. For example, Jacobs and Levy (1996), Copeland and Copeland (1999), Kao and Shumaker (1999), Levis andLiodakis (1999), Oertmann (2000), Black (2002), Lucas et al (2002), Bauer et al (2004), Wang (2005), Ammann and Verhofen (2006), Arshanapalli et al (2007), and Larsen and Resnick (2008) analyze the size and/or value premium. However, in contrast to our study, all these papers focus on one or few predictive models only, apply a different methodology, and analyze an earlier sample period.…”