infonet-economy

The Fama-French-Methodology (1993-1998) offers cross-sectional explanations of returns by taking the specially designed portfolios SMB and HML as additional factors. It is acknowledged that these factors are related to some forms of risk (they bear premia) which, by researchers is often proposed to be related to the uncertainty with respect to macroeconomic production and aggregate consumption. In more recent research a momentum factor is included in order to improve the explanatory power of the Fama-French-Model. We use data from business cycles 1926-2007 to show that SMB represents the risks related to the very early phase of an upswing while HML may be related to the uncertainty whether a business cycle will continue to gain depth and strength (or shifts back into recession). In contrast to SMB and HML, we do not find momentum to be related to risks associated with particular phases of the business cycle.