Macro Trends and Factor Timing

54 Pages Posted: 11 Oct 2021

See all articles by Carlo A. Favero

Carlo A. Favero

Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Alessandro Melone

Vienna Graduate School of Finance (VGSF)

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: October 10, 2021

Abstract

We find that the value of well-known systematic (characteristics-based) risk factors, like SMB and HML, is anchored to macroeconomic trends related to inflation and real economic activity. Exploiting the cointegration logic, when the price of a factor is greater than the long-term value implied by the macro trends, expected returns should be lower over the next period. We provide strong supporting evidence for this intuition: deviations of factor prices from their value implied by macroeconomic conditions predict factor returns both in- and out-of-sample, translating into significant economic gains from the perspective of a mean-variance investor. Finally, our approach leads to an estimated SDF that displays sizable variation over time when benchmarked against standard long-run risk or habit models.

Keywords: Factor Models, Macro-Finance, Factor Timing, SDF, Risk Management.

JEL Classification: C38, G11, G12, G17.

Suggested Citation

Favero, Carlo A. and Melone, Alessandro and Tamoni, Andrea, Macro Trends and Factor Timing (October 10, 2021). Available at SSRN: https://ssrn.com/abstract=3940452 or http://dx.doi.org/10.2139/ssrn.3940452

Carlo A. Favero

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Alessandro Melone (Contact Author)

Vienna Graduate School of Finance (VGSF) ( email )

WU Vienna
Welthandelsplatz 1
Vienna, 1020
Austria

HOME PAGE: http://https://sites.google.com/view/alessandro-melone/home

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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