Dynamic factors and asset pricing: International and further U.S. evidence

He, Zhongzhi (Lawrence), Jie Zhu and Xiaoneng Zhu

Pacific-Basin Finance Journal, 2015, vol. 32, issue C, 21-39

Abstract: The Fama–French pricing model with dynamic factors (DFPM) extracted via the Kalman filter from the six size and book-to-market portfolios has a good performance in understanding stock returns. Using international stock market data, we find that the DFPM significantly improves the cross-sectional explanatory power of the Fama–French three-factor model. In the out-of-sample exercise, we find that the DFPM predicts portfolio returns more accurately than other competing models. The good forecasting performance of the DFPM is economically meaningful because the DFPM generally delivers significant utility gains in asset allocation.

Keywords: International stock markets; Cross-sectional returns; Out-of-sample predictability; Asset allocation (search for similar items in EconPapers)
JEL-codes: C1 C58 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:32:y:2015:i:c:p:21-39

DOI: 10.1016/j.pacfin.2015.02.002

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