Stock returns and macro risks: Evidence from Finland

Virk, NS ORCID: https://orcid.org/0000-0001-6338-2198 (2012) Stock returns and macro risks: Evidence from Finland. Research in International Business and Finance, 26 (1). pp. 47-66. ISSN 0275-5319

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Abstract

Deviations from the CAPM have generally been observed for the stock markets. One of many alternative approaches is using macro variables as systematic risks. We tested with a number of macro risks for the explanation of Finnish industry returns for a period from 1993:03 until 2008:07. The evidence suggests macro risks explain larger cross-sectional variations in average industry returns than the market factor alone and same is reported with the Hansen and Jagannathan (1997) specification measure. The changes in expected returns with a positive shock in the exchange rate risk and unanticipated inflation remain economically persistent for the post euro period, arguably a sign for the regulatory impact of the coordinated policies from European central bank (ECB). The robustness checks show the prevalence of macro risks, and market risk cannot be ignored altogether. © 2011 Elsevier B.V.