The macroeconomic content of international equity market factors |
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Authors: | Sarantis Tsiaplias |
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Affiliation: | 1. Melbourne Institute of Applied Economic and Social Research, The University of Melbourne and Ernst &2. Young , Australia stsiaplias@live.com |
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Abstract: | Although existing research has examined the association between macroeconomic data and particular equity markets, little is known regarding the economic content of the latent factors common to international equity markets. This paper considers the macroeconomic information incorporated in unobserved common equity market factors, as well as the possibility that the macroeconomic sensitivities of the factors differ across alternative levels of volatility. Several models are estimated for 15 developed equity markets to examine the economic composition of the common factors, thereby providing an alternative perspective on the economic fundamentals underlying equity markets. A formal Bayesian selection process suggests that a common structure incorporating global and European factors is preferred to the baseline case of a single global factor or the extended scenario of dual global factors. The common factors are associated with a small set of macroeconomic variables. |
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Keywords: | Applied econometrics Bayesian analysis Econometrics of financial markets Empirical finance International asset pricing |
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