Macroeconomic Risks in Equity Factor Investing

Amenc, Noël; Esakia, Mikheil; Goltz, Felix; Luyten, Ben

doi:10.3905/jpm.2019.1.092

Cited by 22 publications

(5 citation statements)

References 54 publications

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“…During this timeframe the Momentum portfolio only just replicates the market benchmark while mixed and pure PER strategies outperform the market portfolio. As documented in Bretschger and Lechthaler (2018) and Amenc et al. (2019) , results of the profitability-factor-driven portfolios are statistically associated with economic growth and strongly affected by common macroeconomic exposures.…”

Section: Resultsmentioning

confidence: 96%

Factor investing: A stock selection methodology for the European equity market

Bermejo

Figuerola‐Ferretti

Hevia³

et al. 2021

Heliyon

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This paper uses European high capitalization corporate data for the 1991-2019 period to demonstrate that a systematic active management portfolio based on the identification of value, profitability, and momentum factors can outperform competing benchmark strategies. Factor investment methodologies received significant attention in the literature in the U.S. market but their application to European corporates is more limited. The authors construct several systematic investment strategies combining different metrics measuring the three factors. Reported results show that a) combined (mixed/conditional) strategies deliver positive alphas and significantly outperform their pure strategy counterparts and b) while there exists a time changing performance of selected metrics the iterative combination of factors delivers the highest performance with average annualized compounded returns of up to about 17%.Three Key Takeaways: 1. This paper documents the existence of alpha-generating factor strategies based on a combination of value, profitability, and momentum metrics. Combined (mixed/conditional) portfolios significantly outperform their pure strategy counterparts.2. The iterative combination of factors delivers the highest performance with annualized compounded returns of up to 17%.3. In line with the recent literature, we find decaying returns to factor strategies.

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Section: Resultsmentioning

confidence: 96%

Factor investing: A stock selection methodology for the European equity market

Bermejo

Figuerola‐Ferretti

Hevia³

et al. 2021

Heliyon

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“…ESG factors have been studied in conjunction with profitable investment strategies (Ielasi et al , 2020), and studies have found that sustainable investment has a positive effect on equity returns (Friede, 2015; Nagy et al , 2016). Investment in firms that have strong ESG performance, while divesting from firms that have weak ESG performance is a mixed strategy that pressures companies to improve their practices in the hopes of attracting and retaining investors (Amenc et al , 2020).…”

Section: Esg: a Brief Backgroundmentioning

confidence: 99%

Can student managed investment funds (SMIFs) narrow the environmental, social and governance (ESG) skills gap?

Oldford

Willcott

Kennie

2021

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PurposeThe purpose of this paper is twofold. First, it endeavors to document the current state of environmental, social and governance (ESG) pedagogy within undergraduate finance courses of business schools, and second, it seeks to show how business schools can leverage student managed investment funds (SMIFs) to swiftly integrate ESG pedagogy.Design/methodology/approachThe study is comprised of two sections that use different methodologies. The first part of the study involves a manual content analysis of undergraduate finance course textbooks, and related instructor materials are used to estimate the average coverage of ESG-related topics. Next, a case study of a SMIF that has recently integrated an ESG framework is provided to illustrate how this pedagogical innovation is effective in teaching ESG skills.FindingsThe findings of the content analysis of the three most commonly used textbooks in a sample of 17 Canadian universities, as well as associated instructor material, provide evidence that the primary emphasis in traditional curriculum remains on the shareholder, with little attention paid to ESG factors. The case study of an existing SMIF clearly demonstrates how a student-led development of an ESG framework provides the setting for effective, experiential learning.Originality/valueThis study shows that while traditional teaching settings, like lectures, may be slow to adapt to the rapidly changing needs of industry, nontraditional teaching venues, such as SMIFs, can be leveraged to meet industry demand for ESG skills, thereby closing the skills gap, enhancing student employability and increasing the relevance of business school education.

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“…As the factor premium has economic cyclicity, different factors have a similar dependency on macroeconomics. Even amongst factors with low correlation, a multi-factor portfolio may not be able to avoid macroeconomic risks (Amenc et al 2019). In this regard, Campbell (1987) evinces the effectiveness of the term structure of interest rates in predicting excess returns in the US stock market.…”

Section: Introductionmentioning

confidence: 99%

Factor-Based Investing in Market Cycles: Fama–French Five-Factor Model of Market Interest Rate and Market Sentiment

Kuo

Liu

2022

JRFM

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This study explores risk–reward patterns in the US stock market and establishes optimal factor-based investing using the Fama–French five-factor model through market cycles constructed by Shiller’s interest rates and Baker–Wurgler’s sentiments. Our emerging evidence confirms that the high-interest rate, high-sentiment cycle generates higher excess returns, and the low-interest rate, low-sentiment cycle generates lower excess returns, which supports the hypothesis that the market cycles as investment horizons have an asymmetric effect on stock returns. Furthermore, the size factor outperforms in the low-interest rate, low-sentiment cycle, whilst the value factor outperforms in the high-interest rate, high-sentiment cycle. Using the asymmetric GARCH model, the asymmetric leverage effect of interest rates and sentiments on five-factor returns is empirically demonstrated with explanatory power of five-factor characteristics. Unlike previous studies, our findings also imply that high- and low-sentiment cycles asymmetrically affect the value factor, and the value premium does not disappear over time, highlighting the role of the market cycles in five-factor returns.

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Macroeconomic Risks in Equity Factor Investing

Cited by 22 publications

References 54 publications

Factor investing: A stock selection methodology for the European equity market

Factor investing: A stock selection methodology for the European equity market

Can student managed investment funds (SMIFs) narrow the environmental, social and governance (ESG) skills gap?

Factor-Based Investing in Market Cycles: Fama–French Five-Factor Model of Market Interest Rate and Market Sentiment

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