Equity index returns predictability and fama-french factors : a frequency domain analysis

• Autor(a) principal: Magalhães, Luís Carlos Silva
• Data de Publicação: 2022
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.14/38734
• topic: Fama french factors; Index returns; Index returns forecasts; Equity risk premium; Frequency domain; Fatores fama french; Retornos de índices; Previsibilidade de retornos de índices; Prémio de risco de mercado; Domínio de frequência; Domínio/Área Científica::Ciências Sociais::Economia e Gestão

We extend the analysis of Faria and Verona (2020) tothe Fama French 5 factor model to predict the Equity Risk Premium in theS&P500 index. The Fama French 5 factor model is decomposed using themaximal overlap discrete wavelet transform so that we canstudy the forecasting performance of each factor’s different frequencies andtest them out-of-sample. The main findings of this study are that the factorsthemselves are not good predictors of the equity risk premiumout-of-sample, but the 16-128 month frequencyof the HML (high minus low) and, especially the RMW (robust minus weak),are good predictors of the Equity Risk Premium especially in post-2008 crisis. Ourresults support recent findings in the asset pricing literature that the business-cyclefrequency components of financial variables play a crucial role in forecastingthe equity premium. Thus, for both investors and academics, these findingsare of great relevance.