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

Posted: 25 Dec 2004

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

Abstract

Our study examines whether the short-term variation in the Japanese size and value premium is sufficiently predictable to be exploited by a 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 predictor variables, we perform an in-sample estimation of all economically sensible models. Subsequently, a 'best' model is determined according to a selection criterion. However, whereas most studies use in-sample model selection criteria, we introduce an out-of-sample training period to select our models. We then implement our strategy in a second-stage out-of-sample period: the trading period. All stages re-occur on a monthly basis via a rolling window framework. The results confirm sufficient predictability under lower transaction cost levels. Under high transaction costs scenarios it is more difficult to obtain incremental benefits.

Keywords: Size premium, value premium, recursive modeling, model selection, style switching, real time predictability

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. Pacific-Basin Finance Journal, Vol. 12, No. 5, pp. 503-523, 2004. Available at SSRN: https://ssrn.com/abstract=635264

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

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