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US sector rotation with five-factor Fama–French alphas

Author

Listed:
  • Golam Sarwar

    (University of Greenwich)

  • Cesario Mateus

    (University of Greenwich)

  • Natasa Todorovic

    (City University of London)

Abstract

In this paper, we investigate the risk-adjusted performance of US sector portfolios and sector rotation strategy using the alphas from the Fama–French five-factor model. We find that five-factor model fits better the returns of US sector portfolios than the three-factor model, but that significant alphas are still present in all the sectors at some point in time. In the full sample period, 50% of sectors generate significant five-factor alpha. We test whether such alpha signifies a true sector out/underperformance by applying simple long-only and long-short sector rotation strategies. Our long-only sector rotation strategy that buys a sector with a positive five-factor alpha generates four times higher Sharpe ratio than the S&P 500 buy-and-hold. If the strategy is adjusted to switch to the risk-free asset in recessions, the Sharpe ratio achieved is tenfold that of the buy-and-hold. The long-short strategy fares less well.

Suggested Citation

  • Golam Sarwar & Cesario Mateus & Natasa Todorovic, 2018. "US sector rotation with five-factor Fama–French alphas," Journal of Asset Management, Palgrave Macmillan, vol. 19(2), pages 116-132, March.
    • Handle: RePEc:pal:assmgt:v:19:y:2018:i:2:d:10.1057_s41260-017-0067-2
    DOI: 10.1057/s41260-017-0067-2
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    References listed on IDEAS

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    More about this item

    Keywords

    Fama–French five-factor model; US sectors; Performance; Sector rotation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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