Volatility Bounds, Size, and Real Activity Prediction*

This article shows how to extract future real activity information from optimally combined size-sorted portfolios. In particular, we analyze the capacity of the size-based model-free Hansen–Jagannathan volatility bound to predict future economic growth. We find that the volatility bound is a powerful in-sample and out-of-sample predictor of future industrial production growth. The asymmetric sensitivities of small and large companies through the business cycle explain our findings. Alternative volatility bounds estimated with sorting procedures based on book-to-market, momentum, or dividend yield do not show these asymmetric sensitivities or forecasting capacity of output growth.The authors acknowledge financial support from the Ministry of Education and Science and the Ministry of Economics and Competitiveness through grants (ECO2011-29751 to B.N. and ECO2012-34268 to G.R.), respectively. Gonzalo Rubio also acknowledges financial support from Regional Government of Valencia grant (PROMETEO 2008/106) and Copernicus Santander-CEU 36/12