Do industries contain predictive information for the Fama--French factors?

Chikashi Tsuji

Quantitative Finance, 2012, vol. 12, issue 6, 969-991

Abstract: We examine whether the returns of US industry portfolios predict the returns and volatility of Fama and French's small-minus-big (SMB) and high-minus-low (HML) factors. The analysis reveals that all 30 industry returns strongly forecast one-month-ahead SMB factor returns. Moreover, a significant number of industry returns predict the volatility of the SMB and HML factors by up to two or three months. These findings suggest that US industry returns contain profitable information on Fama--French SMB and HML factors, and since most investors cannot extract the profitable information contained in industry returns in a timely manner, this information gradually diffuses in equity markets.

Date: 2012
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DOI: 10.1080/14697681003762271

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