Characteristic-Sorted Portfolios and Macroeconomic Risks - An Orthogonal Decomposition

77 Pages Posted: 17 Jul 2019 Last revised: 8 Feb 2022

See all articles by Christopher Adcock

Christopher Adcock

University of Minho

Wolfgang Bessler

University of Hamburg

Thomas Conlon

University College Dublin

Date Written: October 28, 2021

Abstract

We assess the relative importance of individual macroeconomic variables in explaining the time series variation of a broad range of characteristic-sorted portfolios. Employing an optimal orthogonalization approach, the explained variation in each characteristic-sorted portfolio is decomposed into components associated with individual macroeconomic variables. When examined unconditionally, the set of macroeconomic variables account for only limited explained variation. This low explained variation is partially resolved by allowing for dynamic and non-linear macroeconomic exposure. Finally, we highlight a degree of commonality in the explained macroeconomic variation associated with various characteristic-sorted portfolios, indicating that they proxy for particular macroeconomic characteristics simultaneously.

Keywords: characteristic factors, macroeconomic fundamentals, variance decomposition, quantile regression

Suggested Citation

Adcock, Christopher and Bessler, Wolfgang and Conlon, Thomas, Characteristic-Sorted Portfolios and Macroeconomic Risks - An Orthogonal Decomposition (October 28, 2021). Journal of Empirical Finance, Vol. 65, 2022, Michael J. Brennan Irish Finance Working Paper Series Research Paper No. 22-2, Available at SSRN: https://ssrn.com/abstract=3421394 or http://dx.doi.org/10.2139/ssrn.3421394

Christopher Adcock

University of Minho

Braga, 4700
Portugal

Wolfgang Bessler

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

Thomas Conlon (Contact Author)

University College Dublin ( email )

Smurfit Graduate Business School
Blackrock
Co. Dublin, n/a
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/drthomasconlon/

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