Economics and Business Review

ISSN 2392-1641
e-ISSN 2450-0097

Poznań University of Economics - Poland

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Volume 2 (16) Number 3 pp. 78-98

Paweł Sakowski1, Robert Ślepaczuk2, Mateusz Wywiał3

1Warsaw University, Faculty of Economic Sciences, Warsaw, Poland
2
Warsaw University, Faculty of Economic Sciences, Warsaw, Poland;Union Investment TFI S.A
3
Warsaw University, Faculty of Economic Sciences, Warsaw, Poland;Quedex Derivatives Exchange

Can we invest on the basis of equity risk premia and risk factors from multi-factor models?

Abstract:

We examine two investment algorithms built on the weekly data of world equity
indices for emerging and developed countries in the period 2000–2015. We create
seven risk factors using additional data about market capitalization, book value, country
GDP and betas of equity indices. The first strategy utilizes the theoretical value of
equity risk premium from the seven-factor Markov-switching model with exogenous
variables. We compare theoretical with the realized equity risk premium for a given
index to undertake the buy/sell decisions. The second algorithm works only on eight
risk factors and applies them as input variables to Markowitz models with alternative
optimization criteria. Finally we note that the impact of risk factors on the final results
of investment strategy is much more important than the selection of a particular
econometric model in order to correctly evaluate the equity risk premium.

pub/2016_3_78.pdf Full text available in in Adobe Acrobat format:
http://www.ebr.edu.pl/volume16/issue3/2016_3_78.pdf
Keywords: investment algorithms, multi-factor models, Markov switching model, asset pricing models, equity risk premia, risk factors, Markowitz model.

DOI: 10.18559/ebr.2016.3.6

For citation:

MLA Sakowski, Paweł, et al. "Can we invest on the basis of equity risk premia and risk factors from multi-factor models?." Economics and Business Review EBR 16.3 (2016): 78-98. DOI: 10.18559/ebr.2016.3.6
APA Sakowski, P., Ślepaczuk, R., & Wywiał, M. (2016). Can we invest on the basis of equity risk premia and risk factors from multi-factor models?. Economics and Business Review EBR 16(3), 78-98 DOI: 10.18559/ebr.2016.3.6
ISO 690 SAKOWSKI, Paweł, ŚLEPACZUK, Robert, WYWIAł, Mateusz. Can we invest on the basis of equity risk premia and risk factors from multi-factor models?. Economics and Business Review EBR, 2016, 16.3: 78-98. DOI: 10.18559/ebr.2016.3.6