Factor return forecasting using cashflow spreads

Yiqing Dai, Tariq Haque and Ralf Zurbruegg

International Review of Economics & Finance, 2020, vol. 69, issue C, 917-931

Abstract: We show the value of adding cashflow spreads to value spreads to forecast long/short factor returns. These spreads, namely the profitability and investment spreads, have significant forecasting power for a number of factors. Including these cashflow spreads also increases the predictive power of the value spread since it is a noisy measure of expected factor returns when used alone. Our results hold after controlling for macroeconomic variables and in out-of-sample tests. An implementable dynamic composite factor that adjusts its factor exposure according to the level of value and cashflow spreads has a Sharpe ratio that is nearly 50% higher than that of a static composite factor.

Keywords: Value spread; Profitability spread; Investment spread; Factor returns (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:69:y:2020:i:c:p:917-931

DOI: 10.1016/j.iref.2020.06.018

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