Posted: 20 Apr 2009
Date Written: April 20, 2009
Following the methodology of Chen, Ross, and Roll (1986), we analyze a multi-factor model to explain excess returns of different industry sectors using US-Data 1959-2006. In addition to the market index, we use two macroeconomic factors (industry and consumption growth) to capture different phases of the business cycle. The argument is whether financial investors consider indicators of the early phase of the business cycle (GDP growth) or of the later phases (private consumption), respectively, when they buy or sell stocks. Our findings show: First, the additional explanatory power of the two macroeconomic entities exists but is moderate. Second, the importance of early versus late cyclical indicators depends on the industry sector, and there has also been a shift over time.
Keywords: Multi-factor models, Forecasting asset returns with macroeconomic factors, Business Cycle Phases, US Market, Private Consumption, Gross Domestic Product
JEL Classification: C51 G12
Suggested Citation: Suggested Citation
Airoldi, Lisa and Spremann, Klaus, On the Relationship between Financial Returns and Macroeconomic Factors (April 20, 2009). Available at SSRN: https://ssrn.com/abstract=1392109