Empirical Analysis of the Impact of Macroeconomic Variables on the Performance of Factor Investment Strategies (Smart Beta) in the Iranian Capital Market
Keywords:
Factor investing, Macroeconomic variables, Adaptive portfolio, Economic regimes, Iranian capital marketAbstract
In recent decades, the evolution of financial theories and the development of advanced asset pricing models have paved the way for the emergence of modern investment approaches. Among these, factor investing (smart beta) has emerged as one of the most important approaches, grounded in the identification and exploitation of systematic factors that generate excess returns in financial markets. This approach, which is rooted in the seminal studies of Fama and French (1993, 2015), has today become a core strategy in global asset management. The purpose of the present study is to examine the impact of macroeconomic variables, including economic growth rate, interest rate, and inflation rate, on the performance of five investment factors—size, quality, value, momentum, and low volatility—in the Iranian capital market over the period 2013 to 2024. To this end, the effects of macroeconomic variables on the aforementioned factors were first analyzed using a multivariate regression model. Subsequently, two types of investment portfolios were constructed: an equally weighted five-factor portfolio and an adaptive three-factor portfolio based on the performance of the top three factors in each of the economic regimes of recession, expansion, and stability, and their performances were compared. The findings indicate that macroeconomic variables have a statistically significant impact on the performance of all examined factors, except for the quality factor. Moreover, the results of portfolio performance comparison show that the adaptive three-factor portfolio outperforms the equally weighted five-factor portfolio across all economic regimes. These findings underscore the importance of considering macroeconomic conditions and adopting dynamic approaches in the design of factor-based investment strategies in the Iranian capital market.
References
J. Y. Campbell, "Asset prices, consumption, and the business cycle," in Handbook of Macroeconomics, vol. 1, J. B. Taylor and M. Woodford Eds.: Elsevier, 1999, pp. 1231-1303.
T. Adrian and F. Franzoni, "Learning about beta: Time-varying factor loadings, expected returns, and the conditional CAPM," Journal of Empirical Finance, vol. 16, no. 4, pp. 537-556, 2009, doi: 10.1016/j.jempfin.2009.02.003.
N. F. Chen, R. Roll, and S. A. Ross, "Economic forces and the stock market," Journal of Business, vol. 59, no. 3, pp. 383-403, 1986, doi: 10.1086/296344.
M. Boldrin, L. J. Christiano, and J. D. Fisher, "Habit persistence, asset returns, and the business cycle," Econometrica, vol. 69, no. 6, pp. 1635-1674, 2001, doi: 10.21034/sr.280.
E. F. Fama and K. R. French, "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, vol. 33, no. 1, pp. 3-56, 1993, doi: 10.1016/0304-405X(93)90023-5.
E. F. Fama and K. R. French, "A five-factor asset pricing model," Journal of Financial Economics, vol. 116, no. 1, pp. 1-22, 2015, doi: 10.1016/j.jfineco.2014.10.010.
N. Jegadeesh and S. Titman, "Returns to buying winners and selling losers: Implications for stock market efficiency," Journal of Finance, vol. 48, no. 1, pp. 65-91, 1993, doi: 10.1111/j.1540-6261.1993.tb04702.x.
A. Frazzini and L. H. Pedersen, "Betting against beta," Journal of Financial Economics, vol. 111, no. 1, pp. 1-25, 2014, doi: 10.1016/j.jfineco.2013.10.005.
R. Novy-Marx, "The other side of value: The gross profitability premium," Journal of Financial Economics, vol. 108, no. 1, pp. 1-28, 2013, doi: 10.1016/j.jfineco.2013.01.003.
A. Ang, Asset management: A systematic approach to factor investing. Oxford University Press, 2021.
J. Bender, R. Briand, D. Melas, and R. Subramanian, Foundations of factor investing, 2 ed. MSCI Research, 2022.
R. D. Arnott, C. R. Harvey, V. Kalesnik, and J. T. Linnainmaa, "Rehabilitating factor investing," Journal of Portfolio Management, vol. 49, no. 5, pp. 10-31, 2023.
F. M. Bandi, S. E. Chaudhuri, A. W. Lo, and A. Tamoni, "Business-cycle consumption risk and asset prices," Journal of Econometrics, vol. 222, no. 1, pp. 354-375, 2021.
M. Guidolin, "Markov switching models in empirical finance," Advances in Econometrics, vol. 27, pp. 1-86, 2011, doi: 10.1108/S0731-9053(2011)000027B004.
C. Aloui and D. K. Nguyen, "Regime switching affine processes with applications to finance," Finance and Stochastics, vol. 24, no. 2, pp. 309-345, 2014, doi: 10.1007/s00780-020-00419-2.
L. Wang, Y. Zhou, J. Guo, M. Qi, and N. Wang, "A Markov regime switching model for asset pricing and ambiguity measurement of the stock market," Neurocomputing, vol. 435, pp. 283-294, 2021, doi: 10.1016/j.neucom.2020.12.103.
S. Aghababaei and A. Feghhi, "Inflation, monetary policy, and stock returns in Iran: A regime-switching approach," Iranian Economic Review, vol. 26, no. 4, pp. 735-760, 2022, doi: 10.22059/ier.2022.332145.1007740.
Z. Zhong, "The Impact of Anchoring Effect on Financial Investment Decisions and Coping Strategies," Advances in Economics Management and Political Sciences, vol. 164, no. 1, pp. 50-55, 2025, doi: 10.54254/2754-1169/2025.20718.
H. Zamaniyan, R. Farhadi, and A. Rezaeiyan, "The Role of Genetic Capital and Social Capital in the Development of Investment Knowledge," Journal of Investment Knowledge, vol. 14, no. 2, p. Summer, 2025.
L. Zhao, Q. Li, and J. M. Chen, "How does infrastructure investment boost tourism development?," Tourism Economics, 2025, doi: 10.1177/13548166251315789.
W. Yizhou, "Intellectual Property Risks of Transnational Corporate Investment," Advances in Economics Management and Political Sciences, vol. 181, no. 1, pp. 183-188, 2025, doi: 10.54254/2754-1169/2025.23261.
Downloads
Published
Submitted
Revised
Accepted
Issue
Section
License
Copyright (c) 2025 Reza Tehrani (Author); Amirhossein Khaleghi Targhi
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
