Macro-finance and factor timing: Time-varying factor risk and price of risk premiums
Thiago de Oliveira Souza
No 7/2019, Discussion Papers on Economics from University of Southern Denmark, Department of Economics
Abstract:
This paper documents empirically that increases in the book-to-market spread predict larger market premiums in sample and larger size, value, and investment premiums (also) out of sample. In addition, increases in the investment (or profitability) spread exclusively predict larger investment (or profitability) premiums. This predictability generates “factor timing” strategies that deliver substantial economic gains out of sample. I argue theoretically that the book-to-market spread is a price of risk proxy, while the investment and profitability spreads are factor risk proxies. The evidence confirms standard theoretical predictions in the macro-finance literature and contradicts the hypothesis of constant factor risks.
Keywords: Out of sample; factor timing; time-varying risk; macro-finance; Fama and French (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2019-05-13
New Economics Papers: this item is included in nep-fmk and nep-upt
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Citations: View citations in EconPapers (3)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:sdueko:2019_007
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