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Macro determinants of U.S. stock market risk premia in bull and bear markets

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  • Baetje, Fabian
  • Menkhoff, Lukas

Abstract

This research uses macro factors to explain four standard U.S. stock market risk premia, i.e. the market excess return (RM-RF), size (SMB), value (HML), and momentum (WML). We find in-sample predictive power of macro factors, in particular at a one-year horizon. Differentiating between bull and bear market states roughly doubles forecast performance compared to neglecting market states. All four stock market risk premia can be explained with R-squares of 10% to 25%. However, macro factors have limited predictive power in a true out-of-sample setting.

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Bibliographic Info

Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-520.

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Length: 55 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:han:dpaper:dp-520

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Keywords: stock market; risk premia; factor analysis; market states;

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