US sector rotation with five-factor Fama–French alphas

Golam Sarwar (), Cesario Mateus and Natasa Todorovic ()
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Golam Sarwar: University of Greenwich
Natasa Todorovic: City University of London

Journal of Asset Management, 2018, vol. 19, issue 2, No 5, 116-132

Abstract: Abstract In this paper, we investigate the risk-adjusted performance of US sector portfolios and sector rotation strategy using the alphas from the Fama–French five-factor model. We find that five-factor model fits better the returns of US sector portfolios than the three-factor model, but that significant alphas are still present in all the sectors at some point in time. In the full sample period, 50% of sectors generate significant five-factor alpha. We test whether such alpha signifies a true sector out/underperformance by applying simple long-only and long-short sector rotation strategies. Our long-only sector rotation strategy that buys a sector with a positive five-factor alpha generates four times higher Sharpe ratio than the S&P 500 buy-and-hold. If the strategy is adjusted to switch to the risk-free asset in recessions, the Sharpe ratio achieved is tenfold that of the buy-and-hold. The long-short strategy fares less well.

Keywords: Fama–French five-factor model; US sectors; Performance; Sector rotation (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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DOI: 10.1057/s41260-017-0067-2

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