A macroeconomic hedge portfolio and the cross section of stock returns

A macroeconomic hedge portfolio and the cross section of stock returns

We use a stock's returns on days when important macroeconomic news is released to form a hedge portfolio, which is long (short) in stocks which have a sensitive (insensitive) reaction to the surprise component of the macroeconomic news. This macroeconomic hedge portfolio (MHP) earns a risk prem...

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Veröffentlicht in:Review of financial economics 2021-01, Vol.39 (1), p.73-94
Hauptverfasser: Renz, Maximilian, Stotz, Olaf
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Sprache:eng
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asset pricing
characteristic‐sorted risk factors
expected returns
macroeconomic hedge portfolio
scheduled macroeconomic announcements
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creator Renz, Maximilian
Stotz, Olaf
description We use a stock's returns on days when important macroeconomic news is released to form a hedge portfolio, which is long (short) in stocks which have a sensitive (insensitive) reaction to the surprise component of the macroeconomic news. This macroeconomic hedge portfolio (MHP) earns a risk premium of about 5% p.a. over time and a similar premium when used as a risk factor in an asset pricing model. This premium can be interpreted as a cost of an insurance against unexpected changes in an investor's marginal utility. We show that risk premiums associated with the MHP are estimated with a higher precision than traditional macroeconomic tracking portfolios. Furthermore, when the MHP is present in a common factor model, risk factors like high minus low lose much of their ability to explain the cross section of stock returns.
doi_str_mv 10.1002/rfe.1106
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subjects asset pricing
characteristic‐sorted risk factors
expected returns
macroeconomic hedge portfolio
scheduled macroeconomic announcements
title A macroeconomic hedge portfolio and the cross section of stock returns
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