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A multifactor model of Philippine stock returns using latent macro risk factors

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  • Rodolfo Aquino

Abstract

This study addresses the measurement problem inherent in using published macroeconomic data to proxy for unobservable macro risk factors. Using a structural equation modelling framework, four latent risk factors are identified in addition to the exchange rate and market timing risk factors. The latter two are proxied one-for-one by fluctuations in the nominal peso-dollar exchange rate and the excess return on the portfolio represented by the Phisix. Using transformations of published macroeconomic data as indicator variables, the measurement part of the model appears to capture the essence of the unobservable risk factors they are supposed to measure. The betas or factor loadings generated by the structural model indicate that fluctuations in the risk factors have significant effects on the time variation of stock returns. However, the effects are more pronounced after the onset of the Asian financial crisis than before. Tests of model fit do not reject the hypothesis that the returns are consistent with the six-factor model for the entire period covered by the study, although individual factors are priced only during the 1997-2001 sub-period.

Suggested Citation

  • Rodolfo Aquino, 2004. "A multifactor model of Philippine stock returns using latent macro risk factors," Applied Economics Letters, Taylor & Francis Journals, vol. 11(15), pages 961-968.
    • Handle: RePEc:taf:apeclt:v:11:y:2004:i:15:p:961-968
    DOI: 10.1080/1350485042000285832
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    References listed on IDEAS

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    1. Susana Iglesias Antelo & Jean-Pierre Levy Mangin, 2010. "An analysis of the risk-return relationship in the Spanish capital market using a structural equation model," Applied Economics Letters, Taylor & Francis Journals, vol. 17(14), pages 1397-1403.
    2. Raza, Syed Ali & Jawaid, Syed Tehseen & Afshan, Sahar, 2013. "Is Stock Market Sensitive to Foreign Capital Inflows and Economic Growth? Evidence from Pakistan," MPRA Paper 48399, University Library of Munich, Germany.
    3. ALAM Nafis & TAN Ee Chain, 2012. "Impact Of Financial Crisis On Stock Returns: Evidence From Singapore," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 7(2), pages 5-19, August.
    4. Syed Raza & Syed Jawaid, 2014. "Foreign capital inflows, economic growth and stock market capitalization in Asian countries: an ARDL bound testing approach," Quality & Quantity: International Journal of Methodology, Springer, vol. 48(1), pages 375-385, January.

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