Forecasting the Size Premium Over Different Time Horizons
37 Pages Posted: 1 Nov 2011 Last revised: 6 Nov 2012
Date Written: October 31, 2011
In this paper, we provide evidence that the small stock premium is predictable both in-sample and out-of-sample through the use of a set of lagged macroeconomic variables. We find that it is possible to forecast the size premium over time horizons that range from one month to one year. We demonstrate that the predictability of the size premium allows a portfolio manager to generate an economically and statistically significant active alpha.
Keywords: size effect, size premium, stock return predictability, active alpha
JEL Classification: C13, G12, G17
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