Fama French factors and US stock return predictability
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This article investigates whether the HML, SMB along with the long-term reversal and the momentum factors exhibit both in-sample and out-of-sample forecasting ability for the US stock returns. Our findings suggest that these factors contain significantly more information for future stock market returns than the typically employed financial variables. We also go one step further and test whether these variables can proxy for the aforementioned factors and find that the default spread and to a lesser extent the term spread contain important information for the evolution of the factors examined. Finally, we show that appropriate decompositions of the factors in their size and value components can enhance predictability.
KeywordsFama French factors out-of-sample forecasts momentum reversal return predictability
We have benefited from comments and suggestions by B. Candelon, T. Angelidis, E. Konstantinidi and conference/seminar participants at the 15th International Conference on Macroeconomic Analysis and International Finance in Crete, the 5th International Conference MAF 2012 in Venice, the 5th CSDA International Conference on Computational and Financial Econometrics in London, the 2nd National Conference of the Financial Engineering and Banking Society in Athens, the University of Macedonia in Thessaloniki, the University of Maastricht, Netherlands. The usual disclaimer applies.
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