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

Fabio Panetta ()
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Fabio Panetta: Bank of Italy, Economic Research Department

No 393, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

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.

Keywords: arbitrage pricing theory; return generating process; stock market factors; factor loadings (search for similar items in EconPapers)
JEL-codes: E44 G12 (search for similar items in EconPapers)
Date: 2001-02
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Citations: View citations in EconPapers (2)

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