Title: The effects of local and global risk factors on the S&P 500 stock returns: an empirical investigation

Authors: Mahdy F. Elhusseiny, Mazhar M. Islam

Addresses: Department of Finance and Accounting, School of Business and Public Administration, California State University at Bakersfield, Bakersfield, CA 93311, USA. ' Department of Accounting and Finance, School of Business and Industry, Florida A&M University, Sybil C. Mobley Business Building, 500 Gamble Street, 428 East Wing, Tallahassee, FL 32307–5200, USA

Abstract: In this paper we examine the impact of several local and global risk factors on the stock returns of S&P 500 industries| indices by applying a multifactor arbitrage pricing model. The local macroeconomic factors are industrial production, inflation, changes of expected inflation, term structure, exchange rate and oil prices. We also employ a global version of a single factor model to test the effect of global risk factors proxied by the world market index on industries| stock returns. The industries chosen are banking, chemicals, insurance, telecommunication and utilities. The results based on the multifactor model show that local risk factors have a strong explanatory power in explaining the variations of the monthly excess return of the S&P 500 index. A significant relationship is found between local risk factors and the industries| stock returns. Our findings also show a significant positive beta coefficient associated with the world equity index related to each industry.

Keywords: macroeconomic factors; stock returns; global risk; multifactor models; risk factors; arbitrage pricing; banking industry; chemicals industry; insurance industry; telecommunications industry; utilities industry.

DOI: 10.1504/AJFA.2008.019880

American Journal of Finance and Accounting, 2008 Vol.1 No.1, pp.87 - 101

Published online: 13 Aug 2008 *

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