Sarwar, Golam ORCID: 0000-0003-3060-887X, Mateus, Cesario and Todorovic, Natasa (2016) A tale of two states: asymmetries in the UK small, value and momentum premiums. Applied Economics, 49 (5). pp. 456-476. ISSN 0003-6846 (Print), 1466-4291 (Online) (doi:https://doi.org/10.1080/00036846.2016.1200184)

	PDF (Publisher's PDF) 16097 MATEUS_A_Tale_of_Two_States_2016.pdf - Published Version Restricted to Registered users only Download (1MB)
Preview	PDF 16097 MATEUS_A_Tale_of_Two_States_2016_Accepted.pdf - Accepted Version Download (632kB) | Preview

Abstract

This article performs comparative analysis of the asymmetries in size, value and momentum premium and their macroeconomic determinants over the UK economic cycles, using Markov switching approach. We associate Markov switching regime 1 with economic upturn and regime 2 with economic downturn. We find clear evidence of cyclical variations in the three premiums, most notable being that in the size premium, which changes from positive in expansions to negative in recessions. Macroeconomic indicators prompting such cyclicality the most are variables that proxy credit market conditions, namely the interest rates, term structure and credit spread. Overall, macro factors tend to have more significant impact on the three premiums during economic downturns. The results are robust to the choice of information variable used in modelling transition probabilities of the two-stage Markov switching model. We show that exploiting cyclicality in premiums proves particularly profitable for portfolios featuring small cap stocks in recessions at a feasible level of transaction costs.

Item Type:	Article
Uncontrolled Keywords:	Size; Value and momentum premiums; Two-state Markov switching model; Macroeconomic determinants; Cyclicality
Subjects:	H Social Sciences > HB Economic Theory
Faculty / School / Research Centre / Research Group:	Faculty of Business Faculty of Business > Department of Accounting & Finance
Last Modified:	20 May 2019 11:38
URI:	http://gala.gre.ac.uk/id/eprint/16097

Actions (login required)

View Item

Downloads