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Equity risk factors and macroeconomic growth in Greece.

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. Furthermore, the analysis suggested that the size risk factor had a strong and robust explanatory power for future economic growth. When the investors expect that the economy will expand rapidly, the small capitalization stocks will have, on average, better returns than large capitalization stocks. The value risk factor showed also a positive and statistically significant relationship with future economic growth. When added to the two-factor model, it showed that it contains incremental information over the market risk premium as far as the future state of the macroeconomy is concerned. High book-to-market firms and small capitalisation stocks are better able to prosper during periods of high economic growth and the reverse occurs during periods of low economic growth. However, in the case of the momentum risk factor, there are not any statistically significant results; thus, the momentum factor does have an ability to explain future macroeconomic growth.

P. G. Artikis (*)

Department of Business Administration, University of Piraeus, 80 Karaoli & Dimitriou Str., Piraeus 185 34, Greece


doi: 10.1007/s11294-010-9264-1

Published online: 6 July 2010

[C] International Atlantic Economic Society 2010

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Article Details
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Title Annotation:RESEARCH NOTE
Author:Artikis, Panayiotis G.
Publication:International Advances in Economic Research
Article Type:Report
Geographic Code:4EUGR
Date:Aug 1, 2010
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