Macro-Finance and Factor Timing: Time-Varying Factor Risk and Price of Risk Premiums

55 Pages Posted: 26 Dec 2018 Last revised: 4 May 2020

See all articles by Thiago de Oliveira Souza

Thiago de Oliveira Souza

University of Southern Denmark; Danish Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: May 3, 2020

Abstract

This paper unifies macro-finance and multifactor asset pricing theories to show that, in sample and out of sample: (i) Larger cross-sectional book-to-market medians and spreads - price of risk proxies - predict larger market (in sample), size, value, and investment premiums; (ii) the investment and profitability spreads - factor risk (quantity) proxies - only forecast the investment and profitability premiums, respectively, especially when conditioned on the price of risk. This predictability generates "factor timing" strategies with substantial economic gains, supports the hypothesis of time-varying price of risk in macro-finance theories, and contradicts the hypothesis that the investment and profitability "factors" have constant risks.

Keywords: Out of sample, factor timing, time-varying risk, macro-finance, Fama and French

JEL Classification: G11, G12, G14

Suggested Citation

de Oliveira Souza, Thiago, Macro-Finance and Factor Timing: Time-Varying Factor Risk and Price of Risk Premiums (May 3, 2020). Available at SSRN: https://ssrn.com/abstract=3296418 or http://dx.doi.org/10.2139/ssrn.3296418

Thiago De Oliveira Souza (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

Danish Finance Institute ( email )

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
205
Abstract Views
1,102
rank
130,366
PlumX Metrics