Abstract
Though the size premium and value premium have been well recognized, the risk-based explanations behind them have not yet been extensively exploited. This article examines the economic nature of the Fama-French size and book-to-price factors and establishes a significant link between the style factors and macro-economic state variables using two different approaches: (i) discrete state analysis, and (ii) threshold regression. The results from these two methods support the same conclusions. Firstly, value and small caps have performed best in periods of higher GDP growth; secondly, there exists a positive relationship between unexpected inflation and the value premium, and a negative relationship between unexpected inflation and the size premium; thirdly, value and smaller stocks perform better when short-term interest rates are low; finally, we find a positive relationship between the return premiums and the term spread.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
