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

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  • Ou Hu
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    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. 2007 The Southern Finance Association and the Southwestern Finance Association.

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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 30 (2007)
    Issue (Month): 1 ()
    Pages: 111-127

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    Handle: RePEc:bla:jfnres:v:30:y:2007:i:1:p:111-127

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