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Macroeconomic Fundamentals and Stock Return Dynamics: International Evidence from the Global Finance Area

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  • Ezzeddine ABAOUB

    ()
    (Faculty of Economics and Management Sciences of Nabeul, University of 7 November at Carthage, Tunisia)

  • Mongi ARFAOUI

    ()
    (Faculty of Economics and Management Sciences of Tunis, University El Manar, Tunisia)

  • Hammadi SLITI

    ()
    (Faculty of Economics and Management Sciences of Tunis, University El Manar, Tunisia)

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    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 co-integration 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.

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    Bibliographic Info

    Article provided by ASERS Publishing in its journal Theoretical and Practical Research in Economic Fields.

    Volume (Year): I (2010)
    Issue (Month): 2 (December)
    Pages: 122 - 147

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    Handle: RePEc:srs:tpref1:3:v:1:y:2010:i:2:p:122-147

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    Related research

    Keywords: stock return; macroeconomic volatility; local risk factors; global risk factors; ECM; impulse response functions; forecast error variance decomposition;

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