Article1987

MACRO‐ECONOMIC FACTORS AND STOCK RETURNS

65 citations0/0 files storedThe Journal of Financial Research

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Risk and Volatility Modeling

Abstract

Abstract This paper explores the economic nature of return factors by incorporating a multifactor return generating process into the traditional CAPM. It attempts to remedy the arbitrage pricing theory, which is not capable of assigning proper economic meanings to return factors. There are at least three significant factors associated with general production, investment, financial, and employment variables. These economic factors explain the risk‐return relationship as well as those obtained by the arbitrage pricing theory.

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1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1965The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets 1976The arbitrage theory of capital asset pricing 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1977A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory 1983The relationship between earnings' yield, market value and return for NYSE common stocks 1980An Empirical Investigation of the Arbitrage Pricing Theory

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