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Macroeconomic risks and characteristic-based factor models

Aretz, Kevin and Bartram, Söhnke M. and Pope, Peter (2010) Macroeconomic risks and characteristic-based factor models. Journal of Banking and Finance, 34 (6). pp. 1383-1399. ISSN 0378-4266

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Identification Number: 10.1016/j.jbankfin.2009.12.006

Abstract

We show that book-to-market, size, and momentum capture cross-sectional variation in exposures to a broad set of macroeconomic factors identified in the prior literature as potentially important for pricing equities. The factors considered include innovations in economic growth expectations, inflation, the aggregate survival probability, the term structure of interest rates, and the exchange rate. Factor mimicking portfolios constructed on the basis of book-to-market, size, and momentum therefore, serve as proxy composite macroeconomic risk factors. Conditional and unconditional cross-sectional asset pricing tests indicate that most of the macroeconomic factors considered are priced. The performance of an asset pricing model based on the macroeconomic factors is comparable to the performance of the Fama and French (1993) model. However, the momentum factor is found to contain incremental information for asset pricing.

Item Type: Article
Official URL: http://www.journals.elsevier.com/journal-of-bankin...
Additional Information: © 2010 Elsevier
Subjects: H Social Sciences > HG Finance
Sets: Departments > Accounting
Date Deposited: 23 Oct 2013 09:05
Last Modified: 04 Dec 2014 11:47
URI: http://eprints.lse.ac.uk/id/eprint/53740

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