Macroeconomic Factors DO Influence Aggregate Stock Returns
Mark J. Flannery
University of Florida - Department of Finance, Insurance and Real Estate
University of Southern California - Marshall School of Business - Finance and Business Economics Department
Stock market returns are known to be significantly correlated with inflation and money growth. The impact of real macroeconomic variables on aggregate equity returns has been difficult to establish, perhaps because their effects are neither linear nor time-invariant. We estimate a GARCH model of daily equity returns, in which realized returns and their conditional volatility depend on seventeen macro series' announcements. We find six candidates for priced factors: three nominal (CPI, PPI, and a Monetary Aggregate) and three real (the Balance of Trade, the Employment Report, and Housing Starts).
Notably absent from this list are popular measures of overall economic activity, such as Industrial Production or GNP.
Number of Pages in PDF File: 49
Keywords: stock returns, factor, macroeconomics
JEL Classification: G12, G14
Date posted: October 3, 2002