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The Stability of the Relation between the Stock Market and Macroeconomic Forces

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Author Info
Fabio Panetta () (Bank of Italy, Economic Research Department)
Abstract

This paper identifies the macroeconomic factors that influence Italian equity returns and tests the stability of their relation with securities returns. In the sixteen-year period that has been analyzed the relation between stock returns and the macroeconomic factors is found to be highly unstable: not only are the betas of individual securities virtually uncorrelated over time, but a high percentage of the shares experience a reversal of the sign of the estimated loadings. This result is not confined to single periods or to a small group of shares, but holds in different sub-periods and for securities in all risk classes. These findings suggest that empirical analysis of asset pricing should carefully investigate the specification of the return generating process and the stability of the risk measures.

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Paper provided by Bank of Italy, Economic Research Department in its series Temi di discussione (Economic working papers) with number 393.

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Date of creation: Feb 2001
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Handle: RePEc:bdi:wptemi:td_393_01

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Keywords: arbitrage pricing theory return generating process stock market factors factor loadings

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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  1. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November. [Downloadable!] (restricted)
  2. Ball, Ray & Kothari, S. P., 1989. "Nonstationary expected returns : Implications for tests of market efficiency and serial correlation in returns," Journal of Financial Economics, Elsevier, vol. 25(1), pages 51-74, November. [Downloadable!] (restricted)
  3. Cornell, Bradford, 1983. "Money Supply Announcements and Interest Rates: Another View," Journal of Business, University of Chicago Press, vol. 56(1), pages 1-23, January. [Downloadable!] (restricted)
  4. Lehmann, Bruce N. & Modest, David M., 1988. "The empirical foundations of the arbitrage pricing theory," Journal of Financial Economics, Elsevier, vol. 21(2), pages 213-254, September. [Downloadable!] (restricted)
  5. Chan, K. C. & Chen, Nai-fu & Hsieh, David A., 1985. "An exploratory investigation of the firm size effect," Journal of Financial Economics, Elsevier, vol. 14(3), pages 451-471, September. [Downloadable!] (restricted)
  6. Collins, Daniel W & Ledolter, Johannes & Rayburn, Judy Dawson, 1987. "Some Further Evidence on the Stochastic Properties of Systematic Risk," Journal of Business, University of Chicago Press, vol. 60(3), pages 425-48, July. [Downloadable!] (restricted)
  7. Blume, Marshall E, 1971. "On the Assessment of Risk," Journal of Finance, American Finance Association, vol. 26(1), pages 1-10, March. [Downloadable!] (restricted)
  8. Jensen, Gerald R. & Mercer, Jeffrey M. & Johnson, Robert R., 1996. "Business conditions, monetary policy, and expected security returns," Journal of Financial Economics, Elsevier, vol. 40(2), pages 213-237, February. [Downloadable!] (restricted)
  9. Sunder, Shyam, 1980. " Stationarity of Market Risk: Random Coefficients Tests for Individual Stocks," Journal of Finance, American Finance Association, vol. 35(4), pages 883-96, September. [Downloadable!] (restricted)
  10. Urich, Thomas & Wachtel, Paul, 1981. "Market Response to the Weekly Money Supply Announcements in the 1970s," Journal of Finance, American Finance Association, vol. 36(5), pages 1063-72, December. [Downloadable!] (restricted)
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  1. Giuseppe Grande & Luigi Ventura, 2001. "Labor Income and Risky Assets under Market Incompleteness: Evidence from Italian Data," Temi di discussione (Economic working papers) 399, Bank of Italy, Economic Research Department. [Downloadable!]
    Other versions:
  2. cipollone piero, 2001. "Is the Italian Labour market segmented?," Temi di discussione (Economic working papers) 400, Bank of Italy, Economic Research Department. [Downloadable!]
  3. Stefano Siviero & Daniele Terlizzese, 2001. "Macroeconomic forecasting: Debunking a few old wives' tales," Temi di discussione (Economic working papers) 395, Bank of Italy, Economic Research Department. [Downloadable!]
  4. Luigi Guiso & Luigi Pistaferri & Fabiano Schivardi, 2001. "Insurance within the Firm," Temi di discussione (Economic working papers) 414, Bank of Italy, Economic Research Department. [Downloadable!]
    Other versions:
  5. Matteo Bugamelli & Patrizio Pagano & Francesco Paternò & Alberto Franco Pozzolo & Fabiano Schivardi & Salvatore Rossi, 2001. "Ingredients for the New Economy: How Much does finance matter?," Temi di discussione (Economic working papers) 418, Bank of Italy, Economic Research Department. [Downloadable!]
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  6. Patrizio Pagano & Fabiano Schivardi, 2001. "Firm Size Distribution and Growth," Temi di discussione (Economic working papers) 394, Bank of Italy, Economic Research Department. [Downloadable!]
    Other versions:
  7. Torsten Persson & Guido Tabellini, 2001. "Political Institutions and Policy Outcomes: What are the Stylized Facts?," Temi di discussione (Economic working papers) 412, Bank of Italy, Economic Research Department. [Downloadable!]
    Other versions:
  8. Paolo carnazza & Giuseppe Parigi, 2001. "The Evolution of Confidence for European Consumers and Businesses in France, Germany and Italy," Temi di discussione (Economic working papers) 406, Bank of Italy, Economic Research Department. [Downloadable!]
  9. Luca Dedola & Sylvain Leduc, 2001. "Why is the Business-Cycle Behavior of Fundamentals Alike Across Exchange-Rate Regimes?," Temi di discussione (Economic working papers) 411, Bank of Italy, Economic Research Department. [Downloadable!]
    Other versions:
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