Yield spreads as alternative risk factors for size and book-to-market

Jaehoon Hahn, Hangyong Lee

Research output: Contribution to journalArticlepeer-review

125 Citations (Scopus)


This paper investigates whether the size and book-to-market factors of Fama and French (1993) proxy for the risks associated with business cycle fluctuations. We find that changes in default spread (Δdef) and changes in term spread (Δterm) capture the systematic differences in average returns along the size and book-to-market dimensions in the way that the Fama-French factors do: small stock portfolios have higher loadings on Δdef than large stock portfolios, while high book-to-market portfolios have higher loadings on Δterm than low book-to-market portfolios. Furthermore, in the presence of Δdef and Δterm, the Fama-French factors are superfluous in explaining the size and book-to-market effects. The results suggest that the size and value premiums are compensation for higher exposure to the risks related to changing credit market conditions and interest rates proxied by Δdef and Δterm.

Original languageEnglish
Pages (from-to)245-269
Number of pages25
JournalJournal of Financial and Quantitative Analysis
Issue number2
Publication statusPublished - 2006 Jun

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics


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