TAILIEUCHUNG - MACROECONOMIC FACTORS DO INFLUENCE AGGREGATE STOCK RETURNS

Inverse floating-rate securities are a special kind of floater. Their coupon rates increase when general market rates decrease. For example, the coupon may be 8 percent minus the three-month LIBOR. These securities often appeal to investors when the yield curve is very steep, as the coupon formula will give a coupon rate often well above short term financing costs. However, an increase in LIBOR can cause the interest rate on this type of security to drop very low and possibly to zero. If the security has a long maturity, it can lose significant. | Macroeconomic Factors Do Influence Aggregate Stock Returns Mark J. Flannery University of Florida Aris A. Protopapadakis University of Southern California Stock market returns are 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 where realized returns and their conditional volatility depend on 17 macro series announcements. We find six candidates for priced factors three nominal CPI PPI and a Monetary Aggregate and three real Balance of Trade Employment Report and Housing Starts . Popular measures of overall economic activity such as Industrial Production or GNP are not represented. The hypothesis that macroeconomic developments exert important effects on equity returns has strong intuitive appeal but little empirical support. In multifactor asset pricing models any variable that affects the future investment opportunity set or the level of consumption given wealth could be a priced factor in equilibrium Merton 1973 Breeden 1979 . Securities affected by such undiversifiable risk factors should then earn risk premia in a risk-averse economy Ross 1976 . Macroeconomic variables are excellent candidates for these extramarket risk factors because macro changes simultaneously affect many firms cash flows and may influence the risk-adjusted discount rate. Economic conditions may also influence the number and types of real investment opportunities available. Beginning with Chen Roll and Ross 1986 many articles have tried to show reliable associations between macroeconomic variables and security returns. To date the literature has documented that aggregate stock returns are negatively related to inflation and to money growth Bodie 1976 Fama 1981 Geske and Roll 1983 Pearce and Roley 1983 1985 . The impact of real sector macro variables on equity .

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