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The Macroeconomic Factors and The Returns of Stock

Li, Yan LU (2011) NEKM07 20111
Department of Economics
Abstract (Swedish)
This paper uses three different models Fama-French three-factor model, a Macroeconomic factor model and a combined model to examine the efficiency of the macroeconomic factors in estimating expected returns. The inflation rate and short-term interest rate are chosen as macroeconomic factors. Six European countries, Denmark, Finland, Hungary, Norway, Spain and Sweden, are selected to represent different economies. The combined model has a better performance than the other two models. From the results of combined model, the inflation rates and short-term interest rates have indeed complementary effects on the two size variables. The inflation rate is positively related to return which coincides with the theory. However, short-term interest... (More)
This paper uses three different models Fama-French three-factor model, a Macroeconomic factor model and a combined model to examine the efficiency of the macroeconomic factors in estimating expected returns. The inflation rate and short-term interest rate are chosen as macroeconomic factors. Six European countries, Denmark, Finland, Hungary, Norway, Spain and Sweden, are selected to represent different economies. The combined model has a better performance than the other two models. From the results of combined model, the inflation rates and short-term interest rates have indeed complementary effects on the two size variables. The inflation rate is positively related to return which coincides with the theory. However, short-term interest rate shows some spurious results. Through the check using J-test and HJ-bound, most of the SDF are valid in the GMM/SDF method. A comparison among the different economies shows that the Economic and Monetary Union of the European Union is better in making monetary policies. Further researches should focus on the proxy problem of two size variables in Fama-French three-factor model, and the multi-collinearity problem in both Macroeconomic factor model and combined model. (Less)
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author
Li, Yan LU
supervisor
organization
course
NEKM07 20111
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Stock Return, Fama-French three-factor model, Macroeconomic factor model, Inflation rate, Short-term interest rate
language
English
id
1975531
date added to LUP
2011-08-29 13:19:49
date last changed
2011-08-29 13:19:49
@misc{1975531,
  abstract     = {This paper uses three different models Fama-French three-factor model, a Macroeconomic factor model and a combined model to examine the efficiency of the macroeconomic factors in estimating expected returns. The inflation rate and short-term interest rate are chosen as macroeconomic factors. Six European countries, Denmark, Finland, Hungary, Norway, Spain and Sweden, are selected to represent different economies. The combined model has a better performance than the other two models. From the results of combined model, the inflation rates and short-term interest rates have indeed complementary effects on the two size variables. The inflation rate is positively related to return which coincides with the theory. However, short-term interest rate shows some spurious results. Through the check using J-test and HJ-bound, most of the SDF are valid in the GMM/SDF method. A comparison among the different economies shows that the Economic and Monetary Union of the European Union is better in making monetary policies. Further researches should focus on the proxy problem of two size variables in Fama-French three-factor model, and the multi-collinearity problem in both Macroeconomic factor model and combined model.},
  author       = {Li, Yan},
  keyword      = {Stock Return,Fama-French three-factor model,Macroeconomic factor model,Inflation rate,Short-term interest rate},
  language     = {eng},
  note         = {Student Paper},
  title        = {The Macroeconomic Factors and The Returns of Stock},
  year         = {2011},
}