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

32 Pages Posted: 9 Dec 2002

See all articles by Rob Bauer

Rob Bauer

Maastricht University

Jeroen Derwall

Maastricht University - European Centre for Corporate Engagement; Tilburg University - School of Economics; Maastricht University - Department of Finance

Roderick Molenaar

Robeco Asset Management

Date Written: October 16, 2002

Abstract

In this paper, we examine whether the short-term variation in the size and value premium in the Japanese stock market is sufficiently predictable to be exploited by a tactical timing strategy. In the spirit of Pesaran and Timmermann (1995), 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 first perform an in-sample estimation of all economically sensible models in a rolling window framework. Subsequently, we generate out-of-sample forecasts for all models and evaluate the performance in a model training period. Model selection is based on three well-known selection criteria: hit ratio (% correct sign), the mean return of the strategy and the realized information ratio. We then implement our investment strategy in a second stage out-of-sample period: the trading period. The empirical results confirm sufficient predictability under low levels of transactions costs. Under higher transaction costs scenarios we find it difficult to obtain incremental benefits from style rotation strategies. Moreover, the results are entangled with the choice of forecast horizon and model selection procedure.

Keywords: size premium, value premium, style rotation, recursive modeling, model selection

JEL Classification: C51, C52, C53, G11, G12, G15, G19

Suggested Citation

Bauer, Rob and Derwall, Jeroen and Molenaar, Roderick, The Real-Time Predictability of the Size and Value Premium in Japan (October 16, 2002). Available at SSRN: https://ssrn.com/abstract=341020 or http://dx.doi.org/10.2139/ssrn.341020

Rob Bauer (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 3883871 (Phone)

Jeroen Derwall

Maastricht University - European Centre for Corporate Engagement ( email )

FEBA
Tongersestraat 53
Maastricht, Limburg 6200MD
Netherlands

HOME PAGE: http://www.corporate-engagement.com/

Tilburg University - School of Economics ( email )

P.O. Box 90153
NL-5000 LE Tilburg, Brabant
Netherlands

HOME PAGE: http://www.tilburguniversity.nl/webwijs/show/?uid=j.m.m.derwall

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

HOME PAGE: http://www.fdewb.unimaas.nl/finance/?page=member&id=175

Roderick Molenaar

Robeco Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
577
Abstract Views
2,880
rank
45,858
PlumX Metrics