GDP Mimicking Portfolios and the Cross-Section of Stock Returns

65 Pages Posted: 1 May 2013

See all articles by Tim Alexander Kroencke

Tim Alexander Kroencke

University of Neuchatel - Institute of Financial Analysis

Felix Schindler

Steinbeis University Berlin - Center for Real Estate Studies; ZEW – Leibniz Centre for European Economic Research - International Finance and Financial Management

Steffen P. Sebastian

University of Regensburg - International Real Estate Business School (IREBS)

Erik Theissen

University of Mannheim - Finance Area

Date Written: April 30, 2013

Abstract

The components of GDP (residential investment, durables, nondurables, equipment and software, and business structures) display a pronounced lead-lag structure. We investigate the implications of this lead-lag structure for the cross-section of asset returns. We find that the leading GDP components perform well in explaining the returns of 25 size and book-to-market portfolios and do reasonably well in explaining the returns of 10 momentum portfolios. The lagging components do a poor job at explaining the returns of 25 size and book-to-market portfolios but explain the return of momentum portfolios very well. A three-factor model with the market risk premium, one leading and one lagging GDP component compares very favorably with the Carhart four-factor model in jointly explaining the returns on 25 size/book-to-market portfolios, 10 momentum portfolios and 30 industry portfolios.

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

JEL Classification: E32, G12

Suggested Citation

Kroencke, Tim Alexander and Schindler, Felix and Sebastian, Steffen P. and Theissen, Erik, GDP Mimicking Portfolios and the Cross-Section of Stock Returns (April 30, 2013). Available at SSRN: https://ssrn.com/abstract=2258348 or http://dx.doi.org/10.2139/ssrn.2258348

Tim Alexander Kroencke

University of Neuchatel - Institute of Financial Analysis ( email )

Pierre-a-Mazel,7
Neuchatel, CH-2000
Switzerland

Felix Schindler

Steinbeis University Berlin - Center for Real Estate Studies ( email )

Berlin
Germany

ZEW – Leibniz Centre for European Economic Research - International Finance and Financial Management ( email )

Postfach 103443
Mannheim, D-68034
Germany

Steffen P. Sebastian

University of Regensburg - International Real Estate Business School (IREBS) ( email )

Universitaetsstrasse 31
Regenburg, Bavaria 93040
Germany
+49(941)943-5081 (Phone)
+49(941)943-5082 (Fax)

HOME PAGE: http://www.irebs.de

Erik Theissen (Contact Author)

University of Mannheim - Finance Area ( email )

Mannheim, 68131
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
241
Abstract Views
1,106
rank
126,957
PlumX Metrics