Determinants of stock returns in developed markets

Abstract

This study seeks to investigate how the stock returns within five developed countries: the U.S., the U.K., Germany, France and Japan, are influenced by five macroeconomic variables. After thoroughly analysing different past empirical studies the following macroeconomic variables were selected and implemented for each country: the consumer price index, interest rates, M2 money supply, exchange rate and industrial production index. By using monthly data ranging from 1990 to 2021, Ordinary Least Squares (OLS) regression analysis was conducted to evaluate such associations. Across the five developed countries, the interest rate, exchange rate and industrial production index were found to be statistically significant in explaining stock returns. More specifically statistical significance was observed for the interest rate in the U.K. and France, the exchange rate in the U.S., France and Japan and industrial production index in the U.S. Therefore, these results indicate that only a few, if any (in the case of Germany), were able to explain stock returns. On this basis, it can be concluded that the selected macroeconomic variables for each country are not the optimal factors when it comes to explaining stock return movements. Additional research is needed to identify better factors within this context.