Economic Forces and the Stock Market

Abstract

This paper tests whether innovations in macroeconomic variables arerisks that are rewarded in the stock market. Financial theory suggeststhat the following macroeconomic variables should systematicallyaffect stock market returns: the spread between long and short interestrates, expected and unexpected inflation, industrial production,and the spread between high- and low-grade bonds. We find that thesesources of risk are significantly priced. Furthermore, neither themarket portfolio nor aggregate consumption are priced separately.We also find that oil price risk is not separately rewarded in thestock market.