Can Book-to-Market, Size and Momentum Be Risk Factors That Predict Economic Growth

Jimmy Liew and Maria Vassalou

No 2180, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine the extent to which the profitability of the HML, SMB, and WML trading strategies can be linked to future GDP growth. Using a large cross-section of securities from ten developed markets, we find that the HML and SMB portfolios contain significant information about future GDP growth. The predictive ability of these strategies is to a large degree independent of any information contained in the domestic market factor, which is known to be a leading indicator of economic growth. Even in the presence of popular business cycle variables, HML and SMB retain their ability to predict future economic growth in some of the countries examined. Our results support a risk-based explanation for the performance of the HML and SMB trading strategies. Little evidence was found to support such an explanation in the case of the WML trading strategy.

Keywords: Book-to-Market; GDP growth; Momentum; Trading Strategies (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 (search for similar items in EconPapers)
Date: 1999-06
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Citations: View citations in EconPapers (10)

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