The Stability of the Relation between the Stock Market and Macroeconomic Forces

Abstract

This paper identifies the macroeconomic factors that influence Italian equity returns and tests the stability of their relation with securities returns. The relation between stock returns and the macroeconomic factors is found to be unstable: Not only are the factor loadings of individual securities virtually uncorrelated over time, but a high percentage of the shares experience a reversal of the sign of the estimated loadings. This result is not confined to single periods or to a small group of shares, but holds in different sub-periods and for securities in all risk classes. These findings suggest that research should carefully investigate the specification of the return generating process and the stability of the risk measures.

Keywords: Arbitrage Pricing Theory, Return Generating Process, Stock Market Factors, Factor Loadings

JEL Classification: G12, E44