US Sector Rotation with Five-Factor Fama-French Alphas

27 Pages Posted: 19 Jun 2017

See all articles by G Sarwar

G Sarwar

University of Greenwich - Business School

Cesario Mateus

Aalborg University

Natasa Todorovic

City University London - Sir John Cass Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 16, 2017

Abstract

In this paper we investigate the risk-adjusted performance of US sector portfolios and sector rotation strategy using the alphas from the Fama-French five factor model. We find that five-factor model fits better the returns of US sector portfolios than the three factor model, but that significant alphas are still present in all the sectors at some point in time. In the full sample period, 50% of sectors generate significant five-factor alpha. We test if such alpha signifies a true sector out/underperformance by applying simple long-only and long-short sector rotation strategies. Our long-only sector rotation strategy that buys a sector with a positive five-factor alpha generates four times higher Sharpe ratio than the S&P500 buy-and-hold. If the strategy is adjusted to switch to the risk-free asset in recessions, the Sharpe ratio achieved is ten-fold that of the buy-and-hold. The long-short strategy fares less well.

Keywords: Fama-French Five Factor Model, US sectors, Performance, Sector Rotation

JEL Classification: G10, G11, G12

Suggested Citation

Sarwar, Golam and Mateus, Cesario and Todorovic, Natasa, US Sector Rotation with Five-Factor Fama-French Alphas (June 16, 2017). Available at SSRN: https://ssrn.com/abstract=2987819 or http://dx.doi.org/10.2139/ssrn.2987819

Golam Sarwar

University of Greenwich - Business School ( email )

United Kingdom

Cesario Mateus (Contact Author)

Aalborg University

Fredrik Bajers Vej 7E
Aalborg, DK-9220
Denmark

Natasa Todorovic

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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