City Research Online

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:	Symplectic Administrator

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