This paper studies popular macroeconomic factors based on the gross domestic product (GDP) in a unified framework. Based on theoretical reasons, aggregate GDP as a measure of fundamental risk is an obvious risk factor in asset pricing. From an empirical perspective, aggregate GDP does not correlate well with stock returns and is not useful for explaining average returns.

However, there is a stylized fact in macroeconomics, which has been so far ignored in finance: some components of the GDP lead the aggregate, while some components of the GDP lag the aggregate.

Our empirical findings document that the leading GDP components can explain the size premium and the value premium quite well. We find the opposite for the momentum premium. The lagging GDP components explain the return of momentum portfolios very well. A three-factor model with the market excess return, one leading and one lagging GDP component compares very favorably with the Carhart four-factor model in jointly explaining a large cross-section of size, book-to-market, momentum, and industry portfolio returns.


Business Cycle, Lead, Lag, Size, Value, Momentum