Macro variables and the components of stock returns |
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| Institution: | 1. Hanken School of Economics, Department of Finance and Statistics, Arkadiankatu, 22, 00101 Helsinki, Finland;2. Durham University Business School, Mill Hill Lane, Durham DH1 3LB, UK;1. School of Business and Economics, Loughborough University, Sir Richard Morris Building, Leicestershire LE11 3TU, UK;2. Department of Economics, University of Bath, Claverton Down, Bath BA2 7AY, UK;3. RSJ Algorithmic Trading, Na Florenci 2116/15, 110 00 Prague 1, Czech Republic;4. Economic Research Department, Czech National Bank, Na Příkopě 28, 115 03 Prague 1, Czech Republic;1. Federal Reserve Board, International Finance Division, Mail Stop 43, Washington, DC, 20551, USA;2. PBC School of Finance and National Institute of Financial Research, Tsinghua University, 43 Chengfu Road, Haidian District Beijing 100083, PR China;1. Department of Accounting and Finance, University of North Carolina at Greensboro, Greensboro, NC 27412, USA;2. Department of Finance and SCM, Central Washington University, Ellensburg, WA 98926, USA |
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| 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. |
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