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Harvesting Macroeconomic Risk Premia

Kyriakos Chousakos and Daniel Giamouridis
The Journal of Portfolio Management Multi-Asset Special Issue 2020, jpm.2020.1.149; DOI: https://doi.org/10.3905/jpm.2020.1.149
Kyriakos Chousakos
is a vice president in Scientific Implementation, Data and Innovation Group at BofA Securities in New York, USA
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Daniel Giamouridis
is a managing director and global head of Scientific Implementation, Data and Innovation Group at BofA Securities in London, UK
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Abstract

The authors measure the aggregate state of the economy using variables motivated by the macro-finance literature. In particular, they focus on three specific measures: macro-growth, fragility, and volatility. Macro-growth, a procyclical measure, combines information from a series of macroeconomic variables related to economic growth. Fragility, a procyclical measure, is a proxy for the distance to default of the median firm in the economy. Volatility, a countercyclical measure, summarizes the volume of information produced by investors in equity markets. The authors find that these variables are associated with economically large risk premia, which can be harvested using portfolios composed of stocks, global index exchange-traded funds (ETFs), and cross-asset ETFs.

TOPICS: Volatility measures, analysis of individual factors/risk premia, exchange-traded funds and applications

Key Findings

  • • The measures of macro-growth, fragility, and volatility summarize information related to multiple aspects of the business cycle. This information can be used to construct portfolios that compensate investors for exposure to such aggregate sources of risk.

  • • Long–short equity portfolios with exposures to macro-growth, fragility, and volatility earn 5.43%, 2.26%, and −2.40% per annum, respectively.

  • • Traded versions of the three factors expand the efficient frontier in the factor space, allowing for significant improvements in risk-adjusted performance.

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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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Harvesting Macroeconomic Risk Premia
Kyriakos Chousakos, Daniel Giamouridis
The Journal of Portfolio Management Mar 2020, jpm.2020.1.149; DOI: 10.3905/jpm.2020.1.149

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Harvesting Macroeconomic Risk Premia
Kyriakos Chousakos, Daniel Giamouridis
The Journal of Portfolio Management Mar 2020, jpm.2020.1.149; DOI: 10.3905/jpm.2020.1.149
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    • MACROECONOMIC MEASURES
    • HARVESTING FACTOR PREMIA
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