Macroeconomic Risks and Characteristic-Based Factor Models

37 Pages Posted: 11 Jan 2005 Last revised: 23 Dec 2019

See all articles by Kevin Aretz

Kevin Aretz

Alliance Manchester Business School

Söhnke M. Bartram

University of Warwick; Centre for Economic Policy Research (CEPR)

Peter F. Pope

Bocconi University; London School of Economics and Political Science

Multiple version iconThere are 2 versions of this paper

Date Written: July 26, 2007

Abstract

We use multivariate GMM models to show that book-to-market, size, and momentum capture cross-sectional variation in exposures to a broad set of macroeconomic factors identified in the prior literature as potentially important for pricing equities. The factors considered include innovations in economic growth expectations, inflation, the aggregate survival probability, the term structure of interest rates, and the exchange rate. Factor mimicking portfolios constructed on the basis of book-to-market, size, and momentum therefore serve as proxy composite macroeconomic risk factors. Conditional and unconditional cross--sectional asset pricing tests indicate that most of the macroeconomic factors are priced. The performance of an asset pricing model based on the macroeconomic factors is comparable to the performance of the Fama and French (1993, 1992) model. However, the momentum factor is found to contain incremental information for asset pricing.

Keywords: Fama and French model, Carhart model, asset pricing, book-to-market, size, momentum, macroeconomic pricing factors

JEL Classification: G11, G12, G15

Suggested Citation

Aretz, Kevin and Bartram, Söhnke M. and Pope, Peter F., Macroeconomic Risks and Characteristic-Based Factor Models (July 26, 2007). Journal of Banking and Finance, Vol. 34, No. 6, pp. 1383-1399, June 2010, EFA 2005 Moscow Meetings, WBS Finance Group Research Paper No. 36, Available at SSRN: https://ssrn.com/abstract=646522

Kevin Aretz

Alliance Manchester Business School ( email )

Crawford House
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HOME PAGE: http://www.kevin-aretz.com

Söhnke M. Bartram

University of Warwick ( email )

Warwick Business School
Finance Group
Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Peter F. Pope (Contact Author)

Bocconi University ( email )

Dept of Accounting
Milan, 20136
Italy

London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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