Forecasting the size premium over different time horizons

In this paper, we provide evidence that the small stock premium is predictable both in-sample and out-of-sample through the use of a set of lagged macroeconomic variables. We find that it is possible to forecast the size premium over time horizons that range from one month to one year. We demonstrate that the predictability of the size premium allows a portfolio manager to generate an economically and statistically significant active alpha.

► We find evidence that the size premium is predictable both in- and out-of-sample. ► Forecasting is possible over time horizons that range from one month to one year. ► The predictability of the size premium can be used in active portfolio management.