Factor Investing and Macroeconomic Risk

University essay from Handelshögskolan i Stockholm/Institutionen för finansiell ekonomi

Abstract: This thesis examines the influence of macroeconomic risk on simple investment strategies related to the well-known risk factors size, value and momentum. Based on a sample of 25,224 stocks from ten different countries, quarterly returns between 1999 and 2016 have been analyzed with fixed-effect regression models. Generally, indicators of macroeconomic risk were jointly significant for value-weighted market portfolios but not for factor-mimicking portfolios. In particular, the explanation power of macroeconomic indicators for value excess returns was low. However, development risk in emerging markets had a significant impact on value and size sensitivity to macroeconomic risk. Country idiosyncrasy from fixed-effects could be found for size and value bot not for momentum excess returns. Moreover, higher current-account deficits and sovereign spreads supported the size factor surprisingly. Finally, international momentum investments were particularly affected during the financial crisis 2007-9 and by changes in oil prices.

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