Factor Investing and Macroeconomic Fluctuations: an econometrical perspective

The purpose of this thesis is to provide the existence of a significant relationship between factors' investing and business cycle fluctuations. Although the notion of factor and its definition is extremely debatable, the overall unpredictability with respect to the market is claimed by many traditional works. By analyzing data from the EURO area, different VARs are performed: initially, taking in consideration just factor indexes and their benchmark, the MSCI Europe Total Return Index, then each factor have been analyzed within a specific macroeconomic environment. All the models are computed between 1999q1 and 2013q4 with the support of graphical analysis thanks to IRFs. The final step in each model is the forecast of the included factor index: in most of the case, indexes projections are closer to the observed data within the macro-founded models rather than in the index-only cases. Forecasts fit the data especially in the short run, while in the long run, most of the variability cannot be predicted.