I often see trading strategies and portfolio construction that are based on cross-sectional regression. For example, I often see regressing some numbers against some factors.
I was wondering how cross-sectional regression is used in these scenarios? And how does a cross-sectional regression have forecasting power? And how is the goodness-of-fit of the regression related to the forecasting power?
I have been reading some portfolio management books but couldn't find the application of cross-sectional regression and the relation between the regression and the forecasting power.
Could anybody please shed some light for me?