Macroeconomic Expectations and the Size, Value and Momentum Factors

53 Pages Posted: 1 Mar 2015 Last revised: 17 Mar 2016

See all articles by Mikael C. Bergbrant

Mikael C. Bergbrant

St. Johns University

Patrick J. Kelly

University of Melbourne - Department of Finance

Date Written: March 16, 2016

Abstract

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

Bergbrant, Mikael C. and Kelly, Patrick J., Macroeconomic Expectations and the Size, Value and Momentum Factors (March 16, 2016). Available at SSRN: https://ssrn.com/abstract=2571649 or http://dx.doi.org/10.2139/ssrn.2571649

Mikael C. Bergbrant

St. Johns University ( email )

8000 Utopia Parkway
Queens, NY 11439
United States
8134476288 (Phone)

HOME PAGE: http://www.bergbrant.com

Patrick J. Kelly (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

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