Sarwar, Golam ORCID: https://orcid.org/0000-0003-3060-887X, Mateus, Cesario and Todorovic, Natasa (2017) US sector rotation with five-factor Fama–French alphas. Journal of Asset Management, 19 (2). pp. 116-132. ISSN 1470-8272 (Print), 1479-179X (Online) (doi:10.1057/s41260-017-0067-2)

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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.

Item Type:	Article
Uncontrolled Keywords:	Fama–French five-factor model, US sectors Performance, Sector rotation
Subjects:	H Social Sciences > HF Commerce > HF5601 Accounting
Faculty / School / Research Centre / Research Group:	Faculty of Business Faculty of Business > Department of Accounting & Finance
Last Modified:	17 Mar 2020 10:55
URI:	http://gala.gre.ac.uk/id/eprint/18173

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