Momentum, value, and size strategy returns: the explanatory power of global macroeconomic risks

Abstract The work aims to empirically test whether the returns of Fama–French-Carhart (FFC) portfolio strategies can be explained by higher/lower sensitivity to the five macroeconomic factors considered by Chen-Ross-Roll (the industrial production growth index, the unexpected inflation, changes in inflation expectations, the yield curve, and the default spread) and to measure the premiums of the global macroeconomic risk factors. The work extends the definition of the three FFC strategies to equity, bond, and commodity asset classes and expands the sample of countries analyzed (26 countries from geographic areas around the world: Developed Asia, Canada, Continental Europe, Emerging Markets, Japan, the United Kingdom, and the United States). The results show that the returns of the three strategies are influenced by the overall macroeconomic factors. The result is a dataset of more than 43,000 monthly returns that can also be a useful reference for subsequent studies. The results show that the returns of the three strategies are influenced by the overall macroeconomic factors proposed by CRR and thus there are global premiums for the corresponding risks. The signs of the emerging relationships are also economically meaningful. Moreover, it is shown that macroeconomic factors could explain the observed positive returns of negatively correlated combinations of strategies, for example, of value-momentum and size-momentum combinations.