Macro Variables and the Components of Stock Returns

58 Pages Posted: 15 Mar 2012 Last revised: 2 Apr 2015

See all articles by Paulo F. Maio

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Dennis Philip

Durham University - Department of Economics and Finance

Date Written: March 24, 2015

Abstract

We conduct a decomposition for the stock market return by incorporating the information from 124 macro variables. Using factor analysis, we estimate six common factors and run a VAR containing these factors and financial variables such as the market dividend yield and the T-bill rate. Including the macro factors does not have a significant impact in the estimation of the components of aggregate (excess) stock returns --- cash-flow, discount-rate, and interest-rate news. Using the macro factors in the computation of cash-flow and discount-rate news does not significantly improve the fit of a two-factor ICAPM for the cross-section of stock returns.

Keywords: asset pricing, macroeconomy and stock returns, return decomposition, stock return predictability, discount-rate news, cash-flow news, Intertemporal CAPM, cross-section of stock returns, factor analysis

JEL Classification: E44, G10, G12, G17

Suggested Citation

Maio, Paulo F. and Philip, Dennis, Macro Variables and the Components of Stock Returns (March 24, 2015). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2021885 or http://dx.doi.org/10.2139/ssrn.2021885

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

HOME PAGE: http://sites.google.com/site/paulofmaio/home

Dennis Philip (Contact Author)

Durham University - Department of Economics and Finance ( email )

Department of Economics and Finance
Mill Hill Lane
Durham, DH1 3LB
United Kingdom

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