Characteristic-sorted portfolios and macroeconomic risks—An orthogonal decomposition

Christopher Adcock, Wolfgang Bessler and Thomas Conlon

Journal of Empirical Finance, 2022, vol. 65, issue C, 24-50

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-sorted portfolios; Macroeconomic fundamentals; Variance decomposition (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:65:y:2022:i:c:p:24-50

DOI: 10.1016/j.jempfin.2021.11.001

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