MACROECONOMIC FUNDAMENTALS AND STOCK RETURN DYNAMICS: INTERNATIONAL EVIDENCE FROM THE GLOBAL FINANCE AREA
Abstract
Through this paper, we seek to shed light on the divergence between expected and observed returns. Empirical theory attributes this divergence to macroeconomic fundamental shocks. We try, via an ECM model, to study the existence of cointegration relations between macroeconomic volatility and stock returns dynamics using monthly data over the period 1986 to 2008, for a sample of developed and emerging markets. Furthermore, we aim at quantifying the marginal explanation power of global risk-factors in the current sustained financial globalisation. Our findings show that local factors have an instantaneous effect on emerging markets but not very significantly on developed markets. However, global factors effect persists over the future periods on emerging markets but it is instantaneous and persistent on developed markets. Furthermore, local risk factors contribute increasingly to the explanation of the forecast error variance decomposition. Nevertheless, global factors contribute instantaneously but persist on future periods for the developed markets. Our findings may provide an additional contribution to the question of stock return dynamics as well as to the prediction of the ‘Out-of-sample’ stock return.
References
[2] Adler, Michael. and Dumas Bernard. 1983. International Portfolio Choice and corporate Finance: a synthesis. Journal of Finance 38: 925-984.
[3] Aloui, Chaker. and Jammazi, Rania. 2009. The effects of crude oil shocks on stock market shifts behaviour: a regime switching approach. Energy Economics 31: 789-799.
[4] Basher, Syed A., and Perry Sadorsky. 2006. Oil price risk and emerging stock markets. Global Finance Journal 17: 224-251.
[5] Bekaert, Geert. and Campbell Harvey. 1997. Emerging equity market volatility. Journal of Financial Economics 43: 29-77.
[6] Bekaert Geert, Harvey Campbell R. and Lumsdaine Robin L. 2002. Dating the Integration of World Equity Markets. Journal of Financial Economics 65: 203-247.
[7] Bilson, Christopher M., Brailsford Timothy J. and Hooper Vincent J. 2001. Selecting macroeconomic variables as explanatory factors of emerging stock market returns. Pacific-Basin Finance Journal, 9, 401−426.
[8] Boucher, Christophe. 2007. La réduction de la prime de risque : le rôle du risque macroéconomique. Banque & Marchés n° 87 – mars-avril.
[9] Boudoukh Jacob and Matthew Richardson. 1993. Stock returns and inflation: A long-horizon perspective. American Economic Review 83: 1346-1355.
[10] Breitung, Jörg. 2001. Rank tests for nonlinear cointégration. Journal of Business and Economic Statistics 19: 331-340.
[11] Breitung, Jörg. and Christian Gourieroux. 1997. Rank tests for unit roots. Journal of Econometrics 81: 7-27.
[12] Campello. Murillo, Chen, Long. and Lu. Zhang. 2008. Expected Returns, Yield Spreads, and Asset Pricing Tests. The Review of Financial Studies 21: 1297-1338.
[13] Chen, Nai-Fu., Roll. Richard., and Stephan. A. Ross. 1986. Economic Forces and the stock markets. Journal of Business 59: 383-403.
[14] Cooper Ian, and Kaplanis Evi. 1994. Home Bias in Equity Portfolio, Inflation Hedging, and International Capital Market Equilibrium. Review of Financial Studies 7: 46-60.
[15] Dickey, David A., and Wayne A. Fuller. 1981. Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica 49: 1057-1072.
[16] Elton, Edwin J. 1999. Expected Return, Realized Return and Asset Pricing Tests. Journal of Finance 54: 1199-1220.
[17] Engle, Robert F., and C. W. J. Granger. 1987. Cointegration and error correction: Representation, estimation and testing. Econometrica 55: 251-276.
[18] Fama, Eugene. 1981. Stock returns, real activity, inflation, and money. American Economic Review 71: 545-565.
[19] Ferson Wayne. E., and Harvey Campbell. R. 1998. Fundamental determinants of national equity market returns: a perspective of conditional asset pricing. Journal of Banking and Finance 21: 1625-1665.
[20] Harvey Campbell, R. 1991. The world price of covariance risk. Journal of Finance 46: 111-157.
[21] Haugen, Robert A. and Nardin L. Baker. 1996. Commonality in the determinants of expected stock returns. Journal of Financial Economics 41: 401-439.
[22] Henriques, Irene, and Perry Sadorsky. 2008. Oil prices and the stock prices of alternative energy companies. Energy Economics 30: 998–1010.
[23] Jones Charles M., et Kaul Gautam.1996. Oil and the stock markets. Journal of Finance 51: 463-491.
[24] Jorion, Philippe, 1985. International Portfolio Diversification with Estimation Risk. Journal of Business 58: 259-278.
[25] Kubo Akihiro. 2008. Macroeconomic impact of monetary policy shocks: Evidence from recent experience in Thailand. Journal of Asian Economics 19: 83-91.
[26] Kumar Praveen, Sorin M. Sorescu, Boehme Rodney D., and Danielsen Bartley R. 2008. Estimation Risk, Information, and the Conditional CAPM: Theory and Evidence. Review of Financial Studies 21:1037-1075.
[27] Lanza Alessandro, Manera Mattero, Grasso Margherita, and Massimo Giovannini. 2005. Long-run models of oil stock prices. Environmental Modelling and Software 20: 1423-1430.
[28] MartinLettau,SydneyC.LudvigsonandJessicaA.Wachter.2008.Thedecliningpremium:Whatroledoes macroeconomic risk play? The Review of Financial Studies 21: 1653-1687.
[29] Lütkepohl, Helmut. 1990. Asymptotic distributions of impulse response functions and forecast error variance decompositions of vector autoregressive models. Review of Economics and Statistics 72: 116-125.
[30] Lütkepohl, Helmut and D.S. Poskitt. 1991. Estimating orthogonal impulse responses via vector autoregressive models. Econometric Theory, 7, 487-496.
[31] Lütkepohl, Helmut and D.S. Poskitt. 1996. Testing for causation using infinite order vector autoregressive processes. Econometric Theory 12: 61-87.
[32] Lütkepohl, Helmut. 2004. Vector autoregressive and vector error correction models. in H. Lütkepohl & M. Krätzig (eds), Applied Time Series Econometrics, Cambridge University Press, Cambridge 86-158.
[33] Mandelker, Gershon and Kishore Tandon. 1985. Common stock returns, real activity, money, and inflation: Some international evidence. Journal of International Money and Finance 4: 267-286.
[34] Mukherjee, Tarun K. and Atsuyuki Naka. 1995. Dynamic relations between macroeconomic variables and the Japanese stock market: An application of vector error-correction model. The Journal of Financial Research 8: 223-237.
[35] Oyama, Tsuyoshi. 1997. Determinants of stock prices: the case of Zimbabwe. IMF working paper WP/97/117: 1-44.
[36] Papapetrou Evangelia. 2001. Oil price shocks, stock market, economic activity and employment in Greece. Energy Economics 23: 511-532.
[37] Patro Dilip K., Wald John K., and Yangru Wu. 2002a. The impact of Macroeconomic and Financial variables on market risk: Evidence from international equity returns. European Financial Management 8: 421-447.
[38] Phillips,PeterC.B.,1994. Some exact distribution theory for maximum likelihood estimators of cointegrating coefficients in error correction models. Econometrica 62: 73-93.
[39] Poskitt, D. S., 2003. On the specification of cointegrated autoregressive moving average forecasting systems. International Journal of Forecasting 19: 503-519.
[40] Pretorius, Elna. 2002. ̳Economic determinants of emerging stock market interdependence‘. Emerging Markets Review 3: 84-105.
[41] Sadorsky Perry. 1999. Oil price shocks and stock market activity. Energy Economics 21: 449-469.
[42] Sadorsky, Perry. 2003. The Macroeconomic determinants of technology stock price volatility. Review of Financial Economics 12: 191-205.
Non-Exclusive License under Attribution 4.0 International Public License (CC BY 4.0):
This ‘Article’ is distributed under the terms of the license CC-BY 4.0., which lets others distribute, remix, adapt, and build upon this article, even commercially, as long as they credit this article for the original creation. ASERS Publishing will be acknowledged as the first publisher of the Article and a link to the appropriate bibliographic citation (authors, article title, volume issue, page numbers, DOI, and the link to the Published Article on ASERS Publishing’ Platform) must be maintained.