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Macroeconomic Expectations and the Size, Value, and Momentum Factors

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  • Mikael C. Bergbrant
  • Patrick J. Kelly

Abstract

One of the challenges facing the prior literature when examining the link between macroeconomic risks and the size (SMB), value (HML) and momentum (WML) factors is the difficulty of obtaining direct measures of macroeconomic expectations. We re-examine these relations using direct measures of investor expectations across 20 developed markets. While local and global market returns are robustly related to measures of economic activity, unlike the prior literature we find only a weak relation between HML and changes in expectations about macroeconomic activity. SMB and WML are either unrelated to or act as hedges against macroeconomic risk. This is inconsistent with HML, SMB and WML being priced because they proxy for macroeconomic risks. These findings are not the result of low power tests but rather from the fact that the individual portfolios, which make up the factors, have economically and statistically similar sensitivity to the macroeconomic risks we examine.
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Suggested Citation

  • Mikael C. Bergbrant & Patrick J. Kelly, 2016. "Macroeconomic Expectations and the Size, Value, and Momentum Factors," Financial Management, Financial Management Association International, vol. 45(4), pages 809-844, December.
    • Handle: RePEc:bla:finmgt:v:45:y:2016:i:4:p:809-844
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    File URL: http://hdl.handle.net/10.1111/fima.2016.45.issue-4
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