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Rev Fin 2002; 15:751-782
© 2002 the Society for Financial Studies

Macroeconomic Factors Do Influence Aggregate Stock Returns

Mark J. Flannery
Mark J. Flannery, University of Florida

Aris A. Protopapadakis
Aris A. Protopapadakis, University of Southern California

Address correspondence to Mark J. Flannery, Department of Finance, Insurance, and Real Estate, Graduate School of Business Administration, University of Florida, Gainesville, FL 32611-7168, or e-mail: flannery{at}dale.cba.ufl.edu

Abstract

Stock market returns are significantly correlated with inflation and money growth. The impact of real macroeconomic variables on aggregate equity returns has been difficult to establish, perhaps because their effects are neither linear nor time invariant. We estimate a GARCH model of daily equity returns, where realized returns and their conditional volatility depend on 17 macro series' announcements. We find six candidates for priced factors: three nominal (CPI, PPI, and a Monetary Aggregate) and three real (Balance of Trade, Employment Report, and Housing Starts). Popular measures of overall economic activity, such as Industrial Production or GNP are not represented.


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