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The link between macro-economic factors and style returns

Author

Listed:
  • Qi J Zhang
  • Peter Hopkins
  • Stephen Satchell

    (Trinity College)

  • Robert Schwob

Abstract

Though the size premium and value premium have been well recognized, the risk-based explanations behind them have not yet been extensively exploited. This article examines the economic nature of the Fama-French size and book-to-price factors and establishes a significant link between the style factors and macro-economic state variables using two different approaches: (i) discrete state analysis, and (ii) threshold regression. The results from these two methods support the same conclusions. Firstly, value and small caps have performed best in periods of higher GDP growth; secondly, there exists a positive relationship between unexpected inflation and the value premium, and a negative relationship between unexpected inflation and the size premium; thirdly, value and smaller stocks perform better when short-term interest rates are low; finally, we find a positive relationship between the return premiums and the term spread.

Suggested Citation

  • Qi J Zhang & Peter Hopkins & Stephen Satchell & Robert Schwob, 2009. "The link between macro-economic factors and style returns," Journal of Asset Management, Palgrave Macmillan, vol. 10(5), pages 338-355, December.
    • Handle: RePEc:pal:assmgt:v:10:y:2009:i:5:d:10.1057_jam.2009.32
    DOI: 10.1057/jam.2009.32
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    References listed on IDEAS

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    1. Liew, Jimmy & Vassalou, Maria, 1999. "Can Book-to-Market, Size and Momentum Be Risk Factors That Predict Economic Growth," CEPR Discussion Papers 2180, C.E.P.R. Discussion Papers.
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    7. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
    8. Ralitsa Petkova, 2006. "Do the Fama–French Factors Proxy for Innovations in Predictive Variables?," Journal of Finance, American Finance Association, vol. 61(2), pages 581-612, April.
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    Cited by:

    1. Brian Jacobsen & Wai Lee, 2021. "Macroeconomics and the value premium," Journal of Asset Management, Palgrave Macmillan, vol. 22(4), pages 241-252, July.
    2. 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.
    3. Golam Sarwar & Cesario Mateus & Natasa Todorovic, 2017. "A tale of two states: asymmetries in the UK small, value and momentum premiums," Applied Economics, Taylor & Francis Journals, vol. 49(5), pages 456-476, January.
    4. Olaf Stotz, 2016. "Investment strategies and macroeconomic news announcement days," Journal of Asset Management, Palgrave Macmillan, vol. 17(1), pages 45-56, January.
    5. Seung Woog (Austin) Kwag & Sang Whi Lee, 2012. "Innovative value indicators: Firm specific versus macroeconomic," Journal of Asset Management, Palgrave Macmillan, vol. 13(5), pages 339-347, October.
    6. Ahmed Al Samman & Mahmoud Moustafa Otaify, 2017. "How Does Volatility of Characteristics-sorted Portfolios Respond to Macroeconomic Volatility?," International Journal of Economics and Financial Issues, Econjournals, vol. 7(4), pages 300-315.

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    Keywords

    size; value; style; macro factors;
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