A Forecast Combination Approach to Equity Factor Timing

Risk & Reward, 2020, 1st issue, pp. 41-46

8 Pages Posted: 7 Apr 2020

See all articles by Michael Fraikin

Michael Fraikin

affiliation not provided to SSRN

Edward Leung

Invesco

Harald Lohre

Invesco; Centre for Financial Econometrics, Asset Markets and Macroeconomic Policy, Lancaster University Management School

Date Written: February 5, 2020

Abstract

We investigate the benefits of forecast combination for timing equity factors based on predictive regressions using macro predictors. Relative to standard predictive regression models, forecast combination reduces the noise of forecasts and hence improves their out-of-sample predictive accuracy. Given the nature of macro predictors, the ensuing dynamic model reacts when major macro events happen. Before transaction costs, portfolio simulation results show considerable outperformance of the factor timing model over a static factor allocation. But much of this performance wedge is eroded when transaction costs are taken into account, rendering this article a cautionary tale about the benefits of factor timing.

Keywords: factor investing, factor timing

JEL Classification: G11, D81, D85

Suggested Citation

Fraikin, Michael and Leung, Edward and Lohre, Harald, A Forecast Combination Approach to Equity Factor Timing (February 5, 2020). Risk & Reward, 2020, 1st issue, pp. 41-46. Available at SSRN: https://ssrn.com/abstract=3553260

Michael Fraikin

affiliation not provided to SSRN

Edward Leung (Contact Author)

Invesco ( email )

An der Welle 5
Frankfurt am Main, 60322
Germany

Harald Lohre

Invesco ( email )

An der Welle 5
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.de.invesco.com/portal/site/de-de/home/ueber-uns/invesco-quantitative-strategies/

Centre for Financial Econometrics, Asset Markets and Macroeconomic Policy, Lancaster University Management School

Bailrigg
Lancaster LA1 4YX
United Kingdom

HOME PAGE: http://www.lancaster.ac.uk/lums/research/research-centres/financial-econometrics/

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