Working Paper: CEPR ID: DP3057
Authors: Maria Vassalou
Abstract: A model that includes a factor that captures news related to future Gross Domestic Product (GDP) growth along with the market factor can explain the cross-section of equity returns about as well as the Fama-French model can. Furthermore, the Fama-French factors HML and SMB appear to contain mainly news related to future GDP growth. When news related to future GDP growth is present in the asset-pricing model, HML and SMB lose their ability to explain the cross-section.
Keywords: asset pricing; future GDP; GMM; news
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| news related to future GDP growth (O49) | equity returns (G12) |
| GDP news factor (E20) | ability to explain cross-sectional variation in equity returns (G12) |
| GDP news factor (E20) | HML and SMB factors' ability to explain asset returns (C38) |
| HML and SMB factors (C38) | asset pricing (G19) |