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Global Factor Premiums

Journal: Journal of Financial Economics

Date: 20211201

Author: Baltussen, Guido; Swinkels, Laurens; Van Vliet, Pim

Abstract:
We examine 24 global factor premiums across equity, bond, commodity, and currency markets via replication and out-of-sample evidence between 1800 and 2016. Replication yields ambiguous evidence within a unified testing framework that accounts for p-hacking. Out-of-sample tests reveal strong and robust presence of the large majority of global factor premiums, with limited out-of-sample decay of the premiums. We find global factor premiums to be generally unrelated to market, downside, or macroeconomic risks in the 217 years of data. These results reveal significant global factor premiums that present a challenge to traditional asset pricing theories.

Link: Google Scholar

Key Findings

Strong Evidence for Global Factor Premiums Since 1800

Analysis of 217 years of data reveals robust presence of global factor premiums across equity, bond, commodity and currency markets, with average Sharpe ratios around 0.40

Limited Out-of-Sample Decay

Factor premiums show minimal performance decay between in-sample and pre-sample periods, maintaining their economic significance over two centuries

Not Explained by Traditional Risk Factors

Global factor premiums cannot be explained by market risk, downside risk, or macroeconomic risks over the 217-year sample period

Global Factor Premiums Across Asset Classes

  • Trend and carry show consistently high Sharpe ratios across asset classes
  • Value and BAB factors show weaker performance outside equities
  • Seasonality demonstrates strong performance particularly in bonds

Performance Stability Over Time

  • Most factors maintain positive performance in over 80% of 10-year periods
  • Trend factor shows highest consistency with 99% positive periods for equities
  • BAB factor shows lower consistency outside of equities

Risk Factor Analysis

  • Average downside beta similar to regular beta across factors
  • No significant increase in returns during bad economic states
  • Limited explanation by traditional risk factors

Contribution and Implications

  • Provides first comprehensive examination of global factor premiums across major asset classes over 217 years
  • Challenges traditional asset pricing theories by showing factor premiums cannot be explained by common risk factors
  • Demonstrates remarkable stability of factor premiums across different economic regimes and time periods

Data Sources

  • Factor Premiums Chart: Based on Table 4, Panel B showing full sample Sharpe ratios across asset classes and factors
  • Stability Chart: Constructed using data from Table 6 showing percentage of positive 10-year periods for each factor
  • Risk Analysis Chart: Derived from Table 10 showing factor returns across different economic states