Macroeconomic-Based Risk Factor Models

Macroeconomic-Based Risk Factor Models -...

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Unformatted text preview: 9-1Macroeconomic-Based Risk Factor ModelsSecurity return are governed by a set of broad economic influences in the following fashion by Chen, Roll, and Ross in 1986 (Exhibit 9.3)where:Rm= the return on a value weighted index of NYSE-listed stocksMP=the monthly growth rate in US industrial productionDEI=the change in inflation, measured by the US consumer price indexUI=the difference between actual and expected levels of inflationUPR=the unanticipated change in the bond credit spreadUTS= the unanticipated term structure shift (long term less short term RFR)ittititititimtiiiteUTSbUPRbUIbDEIbMPbRbaR+++++++=][6543219-2Exhibit 9.39-3Burmeister, Roll, and Ross (1994) analyzed the predictive ability of a model based on the following set of macroeconomic factors.Confidence riskTime horizon riskInflation riskBusiness cycle riskMarket timing risk Macroeconomic-Based Risk Factor Models9-4Microeconomic-Based Risk Factor ModelsFama and French (1993) developed a multifactor model specifying the risk...
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