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; European Centre for Corporate Engagement (ECCE)

Jeroen Derwall

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

Roderick Molenaar

affiliation not provided to SSRN

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 Derwall, Jeroen and Molenaar, Roderick, The Real-Time Predictability of the Size and Value Premium in Japan. 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)

European Centre for Corporate Engagement (ECCE) ( email )

Tongersestraat 53
Maastricht, 6211LM
Netherlands

Jeroen Derwall

Maastricht University - European Centre for Corporate Engagement ( email )

FEBA
Tongersestraat 53
Maastricht, Limburg 6200MD
Netherlands

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

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

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

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

Roderick Molenaar

affiliation not provided to SSRN

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