Predicting equity factor premia using macroeconomic indicators

The finance literature has unraveled strong and persistent stock return anomalies such as momentum (Jegadeesh and Titman 1993), value (Fama and French 1993) and profitability (Novy-Marx 2013). Despite the known sensitivity of equity markets to macroeconomic developments, studies on stock return anomalies generally neglect macroeconomic data.

Macroeconomic variables are frequently used to describe the current state of the economy. However, can macroeconomic data also be used to describe the future behavior of the stock market? Can it be used to predict the out- and underperformance of stock returns anomalies?

  • What is the relationship between monetary policy and factor performance?
  • How is quantitative easing affecting the dynamics in the stock market?
  • Most importantly, what can we learn from the macroeconomy to better predict stock returns?

The main goal of this project will be to investigate how to optimally relate stock returns to macroeconomic (surprise) data. We are aware of several papers discussing the relation between macroeconomics and stock returns (such as Rapach and Zhou (2018) and de Goeij, Hu and Werker (2016), among many others). Generating a comprehensive overview of the available literature will help shape the rest of this project. One of the greatest benefits is the exhaustive database we have available, containing a wide array of pre-processed financial data. After an analysis how macroeconomic series relate to stock anomalies, we will pioneer and explore how to combine macroeconomic predictors in a stock-selection model.

Given the nature of this project, candidates with a strong interest in how macroeconomics may affect financial markets would be preferred. Furthermore, it is essential to have strong programming skills (i.e. Python), as well as enthusiasm for Finance. Knowledge of time-series modelling would be a plus.

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De Goeij, Hu and Werker (2016) “Is macroeconomic announcement news priced?”, Bankers, Markets and Investors 143.

Fama and French (1993) “Common risk factors in the returns on stocks and bonds”, Journal of Financial Economics 33(1).

Jegadeesh and Titman (1993) “Returns to buying winners and selling losers: Implications for stock market efficiency”, Journal of Finance 48(1).

Novy-Marx (2013) “The other side of value: The gross profitability premium”, Journal of Financial Economics 108(1).

Rapach and Zhou (2018) “Sparse macro factors”, SSRN working paper