Today there are dozens of papers existing which investigate the relationship between macroeconomic variables such as GDP growth, exchange rates, inflation, etc. and the 4 factors used in the Carhart 4-factor model. However, most of the papers select corresponding control variables a priori and might miss some macroeconomic variables which hold much information about one of the factors. Overcoming this problem constitutes the core of this paper. With a three tiered statistical procedure which comprises the use of clustering and LASSO regressions I am aiming at solving that challenge. I start with more than 300 macroeconomic control variables which proxy for all possible variables out there and select those with the highest explanatory power.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Literature Review
- Potential pitfalls
- Results and conclusions
- Empirical analysis
- Data
- Variable grouping
- Variable selection
- Regression
- Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This research aims to reexamine the connection between the microeconomic factors used in the Carhart 4-factor model and macroeconomic variables within the German equity market from 2006 to 2015. The study expands on traditional models by employing a comprehensive set of macroeconomic variables to capture the potential risks inherent in the German equity market.
- Examining the relationship between microeconomic factors and macroeconomic variables in the German equity market.
- Identifying potential macroeconomic risks affecting investment returns.
- Evaluating the explanatory power of microeconomic factors in relation to macroeconomic risks.
- Assessing the limitations of conventional statistical models in predicting market behavior.
- Exploring the need for more dynamic statistical models for financial analysis.
Zusammenfassung der Kapitel (Chapter Summaries)
- Introduction: This chapter introduces the concept of investment opportunity sets and the Capital Asset Pricing Model (CAPM) as a framework for pricing securities. The chapter also discusses the limitations of the CAPM and the emergence of anomalies, including the size, value, and momentum factors.
- Literature Review: This chapter reviews the existing literature on the relationship between macroeconomic variables and microeconomic factors in financial markets. The chapter also explores potential pitfalls and limitations of previous research.
- Empirical Analysis: This chapter outlines the empirical methodology used in the study, including data sources, variable grouping, variable selection using the Least Absolute Shrinkage and Selection Operator (LASSO), and regression analysis.
Schlüsselwörter (Keywords)
The key terms and focus areas of this research include the Carhart 4-factor model, macroeconomic variables, German equity market, risk premia, size, value, and momentum factors, prototype clustering, LASSO, OLS estimations, and dynamic statistical models.
- Quote paper
- Marwin Zimmermann (Author), 2018, The effect of macroeconomic variables on the size, value and momentum factor in Germany, Munich, GRIN Verlag, https://www.grin.com/document/449782
