The determinants of stock returns in a small open economy

Abstract

This paper examines the determinants of stock returns in a small open economy using an APT framework. The analysis is conducted for the Swiss stock market which has the particularity of including a large proportion of firms that are exposed to foreign economic conditions. Both a statistical and a macroeconomic implementation of the model are performed for the period 1986-2002 with monthly returns on industrial sector indices. The results show that the statistically determined factors yield a better representation of the determinants of stock returns than the macroeconomic variables and that stock returns are influenced by both global and local economic conditions. This suggests that the Swiss stock market is an internationally imperfectly integrated market.

Regime Change and the Role of International Markets on the Stock Returns of Small Open Economies

“…The empirical focus of studies featuring small, open markets concentrates on the importance of international markets such as the UK, Germany and the US. Cauchie et al (2004) address the issue of the determinants of stock returns in a small, open economy. They adopt the APT (arbitrage pricing theory) to model Swiss stock returns and present evidence of the importance of global conditions, including the general economic activity, credit conditions and the stock market environment.…”

Long-Run Inflation and Exchange Rates Hedge of Stocks in Brazil and Mexico

“…In this respect, it is worth noting that a good number of studies have continued recently to present evidence on the impact of exchange rates on stock returns for the case of developed countries, based not only on CAPM and multifactor models, but also using sophisticated research tools (Crowder, 1995;Osdiek, 1998;Fama, 1993Fama, , 1996Grange, Huangh, and Yang, 2001;Morley, 2002;Patro, Wald and Wu, 2002;Kim, 2003;Tamg and Shum, 2003;Vassalou, 2003;Cauchie et al 2004;Ng, 2004;Kolari et al, 2005;Lim, 2005;Groen and Balakrishnan, 2006;Zhang, 2006). The evidence confirms stock returns sensitivity to fluctuations in exchange rates; interestingly, Kolari et al, examining the relationship between the cross-section of U.S. stock returns and foreign exchange rates, find out that the most sensitive stocks to foreign exchange offer lower returns than those that are insensitive, suggesting a negative risk premium for foreign exchange risk.…”

Determinants of Value Creation of GCC Firms -An Application of PLS SEM Model

“…The paper by Amhud (2002) shows that over time, expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock excess return partly represents an illiquidity premium. Severine et al (2004) examines the determinants of stock returns in a small open economy using an APT framework and finds that statistical factors yield a better representation of the determinants of stock returns than macroeconomic variables. Boyer et al (2007) find that the return of Canadian energy stock is positively associated with the Canadian stock market return, with appreciations of crude oil and natural gas prices, with growth in internal cash flows and proven reserves, and Asian Journal of Finance & Accounting ISSN 1946-052X 2015 negatively with interest rates.…”