The Influences Of Macroeconomic Forces On The Value-Momentum Spread Of Global Equities

Abstract

We extend our prior research on the determinants of the value-momentum spread of global equities to investigate the macroeconomic influences on this spread. The common arbitrage pricing theory (APT) macroeconomic forces identified by Chen, Roll and Ross (1986) are employed in a univariate test. Two significant variables extracted from the univariate test include the growth in the industrial production of advanced economies and the U.S. dollar strength relative to the currencies of developed economies. When these two variables are included in a two-factor regression, it is found that the industrial production growth is negatively correlated with the value-momentum spread, while the U.S. dollar strength is positively correlated with the value-momentum spread. Due to the fact that the value-momentum spread declines near the market peak and increases when the market crashes, the growth in industrial production could be regarded as an expansionary indicator and the U.S. dollar strength could be regarded as a contractionary indicator for future economic trends.