Scientific Beta

In this paper, we outline the difference between priced and unpriced factors, motivating the case for managing macroeconomic risks that are unpriced. Next, we outline the methodology for the creation of robust, macro-friendly equity portfolios and conclude with a user case of the Inflation Plus portfolio.

A significant portion of financial news is economic in nature. While the ability to predict changes in the fortunes of nations, industries, or the corner store would be very valuable, it has proven difficult to achieve. Regardless of the difficulty to predict, the musings of the market are driven up or down by changes in the economic outlook. As an industry, both academics and practitioners alike, we have spent significant time on the measurement and management of macroeconomic expectations.

We define relevant macroeconomic variables and construct broad equity portfolios that respond either positively or negatively to surprises in these variables. While the variables we choose are intuitive, namely the short rate, term spread, default spread, and expected inflation, a robust and transparent method for the construction of portfolios that respond to unexpected changes in them has not yet emerged.

The methodology and proofs for this analysis has been published in Amenc, Esakia, Goltz and Luyten (2019) and Esakia and Goltz (2022). Interested readers may consult these papers for a more detailed treatment of this subject.