Equity Factor Predictability

Abstract

This article comprehensively reviews the predictability of six equity factors. These factors are the market excess return, size, value, momentum, low beta and quality. I find predictability for the low beta factor and moderate predictability for the size factor. The results for other factors are mixed. Moreover, predicted returns for the market, size, value and momentum factors are to a large extent driven by a common component. This common component is partly related to the business cycle: the market, size and value factors are anti-cyclical, while the momentum factor is pro-cyclical. However, business cycles can only explain a small part of this common component.

Keywords: return predictability, forecasting, model uncertainty, factor model, forecast combination, principal components

JEL Classification: C53, G11, G12, G17