The Predictability of Risk Factor Returns
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The debate on the effectiveness of return predictability continues in academia while industry practitioners maintain an insatiable appetite for new insights into the predictability of investment returns. Only recently has the focus turned to the predictability of risk factors. To date, this literature has been limited to only a few studies that focus on single-variable forecasting models. This chapter contributes to the literature by examining the predictability of risk-factor investment returns using combination forecasting techniques. The overarching objectives of this chapter are to examine whether individual forecasts of risk-factor returns can be combined to create statistically and economically significant forecasts.
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