Stock Selection, Style Rotation

A. Lucas, R. van Dijk, T. Prof. Kloek

Research output: Contribution to JournalArticleAcademic

Abstract

Using US data from June 1984 to July 1999, we show that the impact of firm-specific characteristics like size and book-to-price on future excess stock returns varies considerably over time. The impact can be either positive or negative at different times. This time variation is partially predictable. We investigate whether the partial predictability signals security mispricing or risk compensation by formulating alternative modeling strategies. The strategies are compared empirically. In particular, we allow for a state-dependent choice of investment styles rather than a once-and-for-all choice for a particular style, for example based on high book-to-price ratios or small market cap values. Using alternative ways to correct for risk, we find significant and robust excess returns to style rotating investment strategies. Business cycle oriented approaches exhibit the best overall performance. Purely statistical models for style rotation or fixed investment styles reveal less robust behavior. © 2002 Elsevier Science B.V. All rights reserved.
Original languageEnglish
Pages (from-to)1-34
Number of pages34
JournalJournal of Empirical Finance
Volume9
Issue number1
DOIs
Publication statusPublished - 2002

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