Sparse Macroeconomic Risks and the Cross-Section of Stock Returns
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The Sword of Damocles: Sparse Macroeconomic Risks and the Cross-section of Stock Returns
Lin Zhu; Fuwei Jiang; Guohao Tang; Fujing Jin
- MNUniversity of Finance and Economics
- Guangdong University of Finance
- Hunan University of Finance and Economics
- Hunan University
- Guangdong University Of Finances and Economics
- ?Guangdong University of Finance & Economics
- ?Hunan University - School of Finance and Statistics
- Central University of Finance and Economics
- Xiamen University
- ?Central University of Finance and Economics (CUFE)
- ?Hunan University - College of Finance and Statistics
- Beijing Jiaotong University
- ?Beijing Jiaotong University, School of Economics and Management
Strategy in a nutshell
U.S. equities (NYSE, AMEX, NASDAQ) are ranked monthly by firm-level macro betas extracted from 127 macroeconomic variables using sparse PCA. Long low-beta portfolios, short high-beta portfolios; equally weighted, rebalanced monthly.
Economic rationale
Macro betas (inflation, production, income, yields, credit) provide predictive power beyond firm fundamentals. Mispricing due to arbitrage frictions and investor sentiment explains how macro exposures affect returns differently across industries.
Backtest performance
Annualised return14.57%
Volatility30.72%
Sharpe ratio0.47