Value, size and momentum portfolios in real time: the cross section of South African stocks

Abstract

We implement a recursive out-of-sample method to examine anomalies-based ex-ante predictability in the cross section of stock returns. We obtain a series of simulated out-of-sample returns, consistent with investors using only prior information when choosing predictor variables. We find that, with commonly used performance criteria, real-time trading strategies based on size, value and momentum effects would not consistently outperform a passive index of South African stocks, despite consistent in-sample excess returns. Our results suggest that the empirical relationship between the anomalous factors and cross-sectional average returns is unstable.