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Turbulence in the Cross-Section: Predicting Factor Premia

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Reference

Stöckl, S. (2018). Turbulence in the Cross-Section: Predicting Factor Premia. Paper presented at the 31st Australasian Finance & Banking Conference, Sydney, Australia.

Publication type

Presentation at 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