The Macroeconomic Content of Equity Market Factors
Melbourne Institute Working Paper No. 23/07
Date: August 2007
Although existing research has examined the association between macroeconomic data and particular equity markets, little is known regarding the economic content of the latent factors common to equity markets. In this paper, several models are estimated to examine the economic composition of the common factors. A Bayesian selection process suggests that a common structure incorporating global and European factors is preferred to either the baseline case of a single global factor or the extended scenario of dual global factors. The common factors appear to be significantly associated with a small set of macroeconomic variables.