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Journal of Asset Management

, Volume 19, Issue 2, pp 116–132 | Cite as

US sector rotation with five-factor Fama–French alphas

  • Golam Sarwar
  • Cesario Mateus
  • Natasa Todorovic
Original Article
  • 112 Downloads

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.

Keywords

Fama–French five-factor model US sectors Performance Sector rotation 

JEL Classification

G10 G11 G12 

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Copyright information

© Macmillan Publishers Ltd., part of Springer Nature 2017

Authors and Affiliations

  • Golam Sarwar
    • 1
  • Cesario Mateus
    • 1
  • Natasa Todorovic
    • 2
  1. 1.University of GreenwichLondonUK
  2. 2.The Centre for Asset Management Research, Cass Business SchoolCity University of LondonLondonUK

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