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

Discussion Papers on Business and Economics, University of Southern Denmark, 7/2019

42 Pages Posted: 15 May 2019

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 13, 2019

Abstract

This paper documents empirically that increases in the book-to-market spread predict larger market premiums in sample and larger size, value, and investment premiums (also) out of sample. In addition, increases in the investment (or profitability) spread exclusively predict larger investment (or profitability) premiums. This predictability generates “factor timing” strategies that deliver substantial economic gains out of sample. I argue theoretically that the book-to-market spread is a price of risk proxy, while the investment and profitability spreads are factor risk proxies. The evidence confirms standard theoretical predictions in the macro-finance literature and contradicts the hypothesis of constant factor 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 13, 2019). Discussion Papers on Business and Economics, University of Southern Denmark, 7/2019, Available at SSRN: https://ssrn.com/abstract=3387301 or http://dx.doi.org/10.2139/ssrn.3387301

Thiago De Oliveira Souza (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

Danish Finance Institute ( email )

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