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Macroeconomic Risks and Characteristic-Based Factor Models

  • Aretz, Kevin
  • Bartram, Söhnke M.
  • Pope, Peter F.

We show that book-to-market, size, and momentum capture cross-sectional variation in exposures to a broad set of macroeconomic factors identified in the prior literature as potentially important for pricing equities. The factors considered include innovations in economic growth expectations, inflation, the aggregate survival probability, the term structure of interest rates, and the exchange rate. Factor mimicking portfolios constructed on the basis of book-to-market, size, and momentum therefore serve as proxy composite macroeconomic risk factors. Conditional and unconditional cross-sectional asset pricing tests indicate that most of the macroeconomic factors are priced. The performance of an asset pricing model based on the macroeconomic factors is comparable to the performance of the Fama and French (1992, 1993) model. However, the momentum factor is found to contain incremental information for asset pricing.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 47344.

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Date of creation: 2010
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Publication status: Published in Journal of Banking and Finance 6.34(2010): pp. 1383-1399
Handle: RePEc:pra:mprapa:47344
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