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Applicability Of The Fama‐French Three‐Factor Model In Forecasting Portfolio Returns

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  • Ou Hu

Abstract

For the model‐based estimation of the equity cost of capital, evidence shows that the common practice of using the average historical factor premiums as the estimates of the next‐period factor premiums generates inaccurate estimates. I propose an alternative way to estimate factor premiums by using the structural variables that are important predictors of future asset returns. Based on the out‐of‐sample results from a trading strategy with four in‐sample model‐selection criteria, I find that my estimation procedure performs better than the common practice even when transaction costs are considered.

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  • Ou Hu, 2007. "Applicability Of The Fama‐French Three‐Factor Model In Forecasting Portfolio Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 30(1), pages 111-127, March.
    • Handle: RePEc:bla:jfnres:v:30:y:2007:i:1:p:111-127
    DOI: 10.1111/j.1475-6803.2007.00205.x
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    Cited by:

    1. Erol Muzir & Cevdet Kizil & Burak Ceylan, 2021. "Role of International Trade Competitive Advantage and Corporate Governance Quality in Predicting Equity Returns: Static and Conditional Model Proposals for an Emerging Market," JRFM, MDPI, vol. 14(3), pages 1-31, March.
    2. Fu, Yufen & Blazenko, George W., 2017. "Normative portfolio theory," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 240-251.
    3. Hayette Gatfaoui, 2010. "Capital Asset Pricing Model," Post-Print hal-00589904, HAL.
    4. İbrahim Ethem Güney & Abdullah Kazdal & Doruk Küçüksaraç & Muhammed Hasan Yılmaz, 2021. "Exchange Rate Sensitivity of Firm Value: Evidence from Nonfinancial Firms Listed on Borsa Istanbul," Springer Books, in: Burcu Adıgüzel Mercangöz (ed.), Handbook of Research on Emerging Theories, Models, and Applications of Financial Econometrics, edition 1, pages 141-165, Springer.

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