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Macroeconomic determinants of cyclical variations in value, size and momentum premiums in the UK

Macroeconomic determinants of cyclical variations in value, size and momentum premiums in the UK

Sarwar, Golam, Mateus, Cesario and Todorovic, Natasa (2015) Macroeconomic determinants of cyclical variations in value, size and momentum premiums in the UK. In: FMA European Conference, 11-12 June 2015, Ca' Foscari University, Venice.

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Abstract

The paper examines the asymmetries in size, value and momentum premiums over the economic cycles in the UK and their macroeconomic determinants. Using Markov switching approach we find clear evidence of cyclical variations of the three premiums, most noticeably variations in size premium. We associate Markov switching regime 1 with economic upturn and regime 2 with economic downturn. The macroeconomic indicators prompting such cyclicality the most are growth in industrial production, term structure, credit spread and money supply. Using forecast returns from our model and a trading strategy that alternates between size/style/momentum portfolios and risk-free rate, we show that exploiting cyclicality in premiums proves particularly profitable for portfolios featuring small cap stocks in recessions.

Item Type: Conference or Conference Paper (Paper)
Uncontrolled Keywords: Size, Value and Momentum premiums, Markov Switching, Macroeconomic determinants, Trading strategy
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Centre for Governance, Risk & Accountability (GRA)
Faculty of Business > Department of Accounting & Finance
Last Modified: 14 Sep 2017 14:46
URI: http://gala.gre.ac.uk/id/eprint/17626

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