Turbulence in the Cross-Section: Predicting Factor Premia

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Reference

Stöckl, S. (2018). Turbulence in the Cross-Section: Predicting Factor Premia. Presented at the 2nd INFINITI Conference on International Finance ASIA-PACIFIC, Sydney, Australia.

Publication type

Presentation at Scholarly Conference

Abstract

Theories that explain the size of factor premia are rare. We show that parameter uncertainty based on the turbulence within each cross-section of factor portfolios produces a significant out-of-sample forecast for six out of seven tested Fama-French risk factors, yielding the best predictor among a variety of popular predictors in five of these cases. A simple trading strategy corroborates these findings economically. Therefore, one measure predicts all the premia solely based on information contained in its own cross-section.

Persons

Organizational Units

  • Chair in Finance
  • Institute for Finance