Macroeconomic Expectations and the Size, Value and Momentum Factors
53 Pages Posted: 1 Mar 2015 Last revised: 17 Mar 2016
Date Written: March 16, 2016
One challenge when examining the links between macroeconomic risks and the size (SMB), value (HML) and momentum (WML) factors is the difficulty of obtaining direct measures of macroeconomic expectations. We examine these relations using changes in macroeconomic forecasts and surprises to proxy for changes in expectations across 20 markets. The sensitivity of cash-flow-to-price based HML, SMB and WML is often insignificant and close to zero, or the factors hedge macroeconomic risk. Only book-to-market based HML is related to changes in GDP growth forecasts, but these findings are not robust when we examine the reaction to GDP surprises. Importantly, the weak relation between factors and risks is not the result of low power tests, but is due to the long and short portfolios having economically and statistically similar sensitivity to macroeconomic risks. Together these findings are inconsistent with HML, SMB and WML being priced as compensation for macroeconomic risks.
Keywords: Fama-French Factors, Book-to-market, Size, Momentum, Macroeconomic risk, expectations
JEL Classification: G12, G15, F30
Suggested Citation: Suggested Citation