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Macro-finance and factor timing: Time-varying factor risk and price of risk premiums

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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.

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  • de Oliveira Souza, Thiago, 2019. "Macro-finance and factor timing: Time-varying factor risk and price of risk premiums," Discussion Papers on Economics 7/2019, University of Southern Denmark, Department of Economics.
    • Handle: RePEc:hhs:sdueko:2019_007
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    Cited by:

    1. Souza, Thiago de Oliveira, 2020. "Dollar carry timing," Discussion Papers on Economics 10/2020, University of Southern Denmark, Department of Economics.
    2. sonia KOUKI, 2019. "Analysis of Risk Premium Behavior in the Tunisian Foreign Exchange Market During Crisis Period," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 10(2), pages 28-38, December.
    3. sonia KOUKI, 2019. "Analysis of Risk Premium Behavior in the Tunisian Foreign Exchange Market During Crisis Period," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 10(2), pages 28-38, December.

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    More about this item

    Keywords

    Out of sample; factor timing; time-varying risk; macro-finance; Fama and French;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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