Macroeconomic Determinants of Cyclical Variations in Value, Size and Momentum Premiums in the UK

37 Pages Posted: 22 Mar 2015

See all articles by Sohan Sarwar

Sohan Sarwar

University of Greenwich - Business School

Cesario Mateus

Aalborg University Business School

Natasa Todorovic

City University London - The Business School

Date Written: March 20, 2015

Abstract

The paper examines the asymmetries in size, value and momentum premiums over the economic cycles in the UK and their macroeconomic determinants. Using Markov switching approach we find clear evidence of cyclical variations of the three premiums, most noticeably variations in size premium. We associate Markov switching regime 1 with economic upturn and regime 2 with economic downturn. The macroeconomic indicators prompting such cyclicality the most are growth in industrial production, term structure, credit spread and money supply. Using forecast returns from our model and a trading strategy that alternates between size/style/momentum portfolios and risk-free rate, we show that exploiting cyclicality in premiums proves particularly profitable for portfolios featuring small cap stocks in recessions.

Keywords: Size, Value and Momentum premiums, Markov Switching, Macroeconomic determinants, Trading strategy

JEL Classification: G11, E32

Suggested Citation

Sarwar, Sohan and Mateus, Cesario and Todorovic, Natasa, Macroeconomic Determinants of Cyclical Variations in Value, Size and Momentum Premiums in the UK (March 20, 2015). Available at SSRN: https://ssrn.com/abstract=2581728 or http://dx.doi.org/10.2139/ssrn.2581728

Sohan Sarwar

University of Greenwich - Business School ( email )

United Kingdom

Cesario Mateus (Contact Author)

Aalborg University Business School ( email )

Aalborg
Denmark

Natasa Todorovic

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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