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Article

Macroeconomic Risks in Equity Factor Investing

Noël Amenc, Mikheil Esakia, Felix Goltz and Ben Luyten
The Journal of Portfolio Management September 2019, jpm.2019.1.092; DOI: https://doi.org/10.3905/jpm.2019.1.092
Noël Amenc
is the chief executive officer of Scientific Beta and a professor of finance at EDHEC Business School in Singapore
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Mikheil Esakia
is a quantitative research analyst at Scientific Beta in Nice, France
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Felix Goltz
is the research director at Scientific Beta in Nice, France
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Ben Luyten
is a quantitative research analyst at Scientific Beta in Nice, France
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Abstract

There is a consensus that equity factors are cyclical and depend on macroeconomic conditions. To build well-diversified portfolios of factors, one needs to account for the fact that different factors may have similar dependencies on macroeconomic conditions. The authors provide a protocol for selecting relevant macroeconomic state variables that reflect changes in expectations about the aggregate economy. They show that returns of standard equity factors depend significantly on such state variables. Factor returns also depend on aggregate macroeconomic regimes reflecting good and bad times. These macroeconomic risks have strong portfolio implications. For example, some equity factors depend on interest rate risk. Investors who already have exposure to this risk through bond investments may increase loss risk when tilting to the wrong equity factors. The authors also show that standard multifactor allocations do not sufficiently address macroeconomic conditionality. Combining factors may not reduce macroeconomic risks even for factors with low correlation. Understanding macroeconomic risks is a prerequisite both for risk transparency and for improving diversification of equity factor investments.

TOPICS: Factor-based models; analysis of individual factors/risk premia; factors, risk premia

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The Journal of Portfolio Management: 49 (3)
The Journal of Portfolio Management
Vol. 49, Issue 3
February 2023
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Macroeconomic Risks in Equity Factor Investing
Noël Amenc, Mikheil Esakia, Felix Goltz, Ben Luyten
The Journal of Portfolio Management Jul 2019, jpm.2019.1.092; DOI: 10.3905/jpm.2019.1.092

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Macroeconomic Risks in Equity Factor Investing
Noël Amenc, Mikheil Esakia, Felix Goltz, Ben Luyten
The Journal of Portfolio Management Jul 2019, jpm.2019.1.092; DOI: 10.3905/jpm.2019.1.092
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  • Article
    • Abstract
    • REQUIREMENTS FOR RELEVANT MACROECONOMIC VARIABLES
    • MEASURING MACROECONOMIC SENSITIVITIES OF EQUITY FACTOR RETURNS
    • AGGREGATING ECONOMIC SIGNALS TO DEFINE ECONOMIC REGIMES
    • TOWARD MANAGING MACRO RISKS
    • CONCLUSION
    • ACKNOWLEDGMENTS
    • ADDITIONAL READING
    • ENDNOTES
    • REFERENCES
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