Where Is the Risk in Risk Factors? Evidence from the Vietnam War to the COVID-19 Pandemic.

34 Pages Posted: 8 Jun 2020

See all articles by Paul Geertsema

Paul Geertsema

University of Auckland - Department of Accounting and Finance

Helen Lu

University of Auckland - Department of Accounting and Finance

Date Written: June 6, 2020

Abstract

During the COVID-19 pandemic (Jan 2020 - Mar 2020) all of the Fama and French (2018) factors except momentum lost money. Negative payoffs in a bad state would appear to justify the positive premia generated by these risk factors. But this is atypical – historically the value, profitability, investment and momentum factors are all more profitable in bear markets. The five non-market factors exhibit their own bull and bear market phases, but these do not correlate with the economic cycle. Factor profitability in bear markets arise primarily from the short side. Biased expectations corrected around earnings announcement offer only a partial explanation.

Keywords: Risk factors; COVID-19; Bear markets; Short-sales constraints; Biased expectations

JEL Classification: G12; G14

Suggested Citation

Geertsema, Paul G. and Lu, Helen, Where Is the Risk in Risk Factors? Evidence from the Vietnam War to the COVID-19 Pandemic. (June 6, 2020). Available at SSRN: https://ssrn.com/abstract=3620691 or http://dx.doi.org/10.2139/ssrn.3620691

Paul G. Geertsema

University of Auckland - Department of Accounting and Finance ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Helen Lu (Contact Author)

University of Auckland - Department of Accounting and Finance ( email )

Private Bag 92019
Auckland 1001
New Zealand

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