Equity Risk Factors and Macroeconomic Growth in Greece

Article excerpt

The relationship between macroeconomic variables and financial markets has long been a goal of financial economics. The objective of the present research is to provide further evidence in the relationship between equity risk factors (market risk, value, size, and momentum) and future economic activity, as measured by the GDP growth rate. Specifically, it focuses on a sample of companies from a small European stock market, the Athens Stock Exchange (ASE), from 1995 to 2008, that has totally different characteristics from other mature stock markets which also changed status in year 2001 from an emerging to a developed market.

The methodology employed involved the performance of a step-wise regression analysis of future macroeconomic growth, as proxied by GDP growth (continuously compounded one period hence), against the lagged returns of the four risk factors. The one year time lag between the dependent and independent variables was used in order to test for the prediction ability of the risk factors for future GDP growth.

The results support the existence of a value, size, and momentum effect, since all risk factors had a positive statistically significant average return. The findings from the research model showed that the market risk premium can serve as a leading indicator for future economic activities. …