Do macroeconomic factors affect U.S. stock market returns?

Abstract

Macroeconomic factors and their influence on stock returns is a widely discussed topic in both previous and recent academic literature. In this paper, we examine whether macroeconomic factors affect U.S. stock market returns or their conditional volatilities. We approach this by estimating an EGARCH model of monthly stock returns, where returns and their conditional volatilities depend on different macroeconomic factors` changes. This analysis successfully finds three candidates (CPI, IP, and M1) affecting the level of returns and two candidates (GDP and M1) affecting the conditional volatility of those returns. The wellknown measure for unemployment (UNEMP) is not represented as a potential candidate.