We examine whether the Chen–Zhang factors, INV and ROA, are related to the macroeconomy. We document that returns on the Chen–Zhang factors tend to covary positively with macroeconomic conditions: they tend to be high in good economic states, while low in bad
economic states. We also find that INV and ROA incorporate critical information about the future state of the macroeconomy. The Chen–Zhang factors have some predictive power with respect to forward-looking economic variables, including growth in: GDP, consumption, labor
income, industrial production, and the three-month T-bill returns. Even in the presence of business cycle variables, the Chen–Zhang factors maintain positive relation with future economic activity.
JEL classification: G12
Keywords: Chen and Zhang three-factor model; macroeconomic risk
