PT - JOURNAL ARTICLE AU - Aiguo Kong AU - David E. Rapach AU - Jack K. Strauss AU - Guofu Zhou TI - Predicting Market Components Out of Sample:<br/> <em>Asset Allocation Implications</em> AID - 10.3905/jpm.2011.37.4.029 DP - 2011 Jul 31 TA - The Journal of Portfolio Management PG - 29--41 VI - 37 IP - 4 4099 - https://pm-research.com/content/37/4/29.short 4100 - https://pm-research.com/content/37/4/29.full AB - The authors analyze out-of-sample return predictability for components of the aggregate market, focusing on the well-known Fama–French size/value-sorted portfolios. Employing a forecast combination approach based on a variety of economic variables and lagged component returns as predictors, they find significant evidence of out-of-sample return predictability for nearly all component portfolios. Moreover, return predictability is typically much stronger for small-cap/high book-to-market value stocks. The pattern of component return predictability is enhanced during business cycle recessions, linking component return predictability to the real economy. Considering various component-rotation investment strategies, the authors show that out-of-sample component return predictability can be exploited to substantially improve portfolio performance.TOPICS: Portfolio construction, exchanges/markets/clearinghouses, statistical methods