Macroeconomic Fundamentals and Stock Return Dynamics: International Evidence from the Global Finance Area
AbstractThrough 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 InfoArticle 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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Web page: http://www.asers.eu/journals/tpref.html
stock return; macroeconomic volatility; local risk factors; global risk factors; ECM; impulse response functions; forecast error variance decomposition;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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