City Research Online

US sector rotation with five-factor Fama–French alphas

Sarwar, G., Mateus, C. & Todorovic, N. (2017). US sector rotation with five-factor Fama–French alphas. Journal of Asset Management, 19(2), pp. 116-132. doi: 10.1057/s41260-017-0067-2

Abstract

In this paper, we investigate the risk-adjusted performance of US sector portfolios and sector rotation strategy using the alphas from the Fama–French five-factor model. We find that five-factor model fits better the returns of US sector portfolios than the three-factor model, but that significant alphas are still present in all the sectors at some point in time. In the full sample period, 50% of sectors generate significant five-factor alpha. We test whether such alpha signifies a true sector out/underperformance by applying simple long-only and long-short sector rotation strategies. Our long-only sector rotation strategy that buys a sector with a positive five-factor alpha generates four times higher Sharpe ratio than the S & P 500 buy-and-hold. If the strategy is adjusted to switch to the risk-free asset in recessions, the Sharpe ratio achieved is tenfold that of the buy-and-hold. The long-short strategy fares less well.

Publication Type: Article
Additional Information: This is a post-peer-review, pre-copyedit version of an article published in Journal of Asset Management. The final authenticated version is available online at: http://dx.doi.org/10.1057/s41260-017-0067-2.
Publisher Keywords: Fama-French Five Factor Model, US sectors, Performance, Sector Rotation.
Departments: Bayes Business School > Finance
SWORD Depositor:
[thumbnail of FF5%20sector%20rotation_JAM_revised20Sept17.pdf]
Preview
Text - Accepted Version
Download (387kB) | Preview

Export

Add to AnyAdd to TwitterAdd to FacebookAdd to LinkedinAdd to PinterestAdd to Email

Downloads

Downloads per month over past year

View more statistics

Actions (login required)

Admin Login Admin Login