Abstract

We propose firm-level measures of exposures to macroeconomic risks that substantially improve out-of-sample robustness compared to standard estimation approaches. Systematic equity strategies constructed from such measures offer more consistent macro exposures out of sample than strategies that allocate across sectors or equity-style factors. We do not find significant cost to the performance of such systematic strategies in exchange for targeting exposures to macroeconomic risks, such as interest rates, term spread, credit spread, or inflation. Our methodology can be used to construct equity portfolios for investors who have hedging demands or active views regarding macroeconomic conditions.

Scientific Portfolio AI- Generated Summary

The paper “Targeting Macroeconomic Exposures in Equity Portfolios” presents a systematic approach for targeting macroeconomic exposures in equity portfolios. The authors propose a firm-level measurement approach that goes beyond analyzing sector differences and instead exploits the heterogeneity of risk exposures at the firm level. The approach is transparent and replicable, and it relies on three ingredients: a macroeconomic factor model, a firm-level risk exposure model, and a portfolio optimization model.

The authors test their approach on a sample of US stocks and find that it delivers robust exposures out of sample. They also compare their approach to other methods, such as sector-based approaches and approaches that use textual analysis of company risk disclosures and find that their approach outperforms these methods in terms of out-of-sample robustness.

The authors also discuss the practical implications of their approach for portfolio managers. They note that their approach can be used to target specific macroeconomic exposures, such as inflation or interest rate risk, and that it can be used to construct portfolios that are more resilient to macroeconomic shocks. They also note that their approach can be used to complement other investment strategies, such as factor investing or active management.

Overall, the authors’ approach provides a useful tool for portfolio managers who are looking to target specific macroeconomic exposures in their equity portfolios. The approach is transparent, replicable, and delivers robust exposures out of sample. The authors’ findings suggest that their approach can be used to construct portfolios that are more resilient to macroeconomic shocks and that it can be used to complement other investment strategies.