Fama-French Factors and Business Cycles

19 Pages Posted: 10 Dec 2017

See all articles by Arnav Sheth

Arnav Sheth

Massachusetts Institute of Technology (MIT); Minerva Schools at KGI; Saint Mary's College of California

Tee Lim

Saint Mary's College of California

Date Written: December 4, 2017

Abstract

We examine the behavior of Fama-French factors across business cycles measured in various ways. We first split up the business cycles into four stages and examine the cumulative returns of factors in each of those stages. We then look at the behavior of the factors after a yield curve inversion starts and ends, as the relationship between yield curve inversions and recessions has been well-explored. We finally run a logistic regression to test the predictive power of the term spread on the NBER recession indicator. Our results show that there is an effect on the factors of each of our four stages, and there is limited predictive power from the recession probabilities. We believe this is of practical importance to portfolio managers who are factor-oriented in their approach.

Keywords: factor investing, yield curve, term spread, business cycles, recessions

Suggested Citation

Sheth, Arnav and Lim, Tee, Fama-French Factors and Business Cycles (December 4, 2017). Available at SSRN: https://ssrn.com/abstract=3082577 or http://dx.doi.org/10.2139/ssrn.3082577

Arnav Sheth (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

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Minerva Schools at KGI ( email )

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Saint Mary's College of California ( email )

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Moraga, CA 94556
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Tee Lim

Saint Mary's College of California ( email )

P.O. Box 4240
Moraga, CA 94575-4240
United States

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