Macroeconomic Factors Do Influence Aggregate Stock Returns

Abstract

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.

Keywords: stock returns, factor, macroeconomics

JEL Classification: G12, G14