Explaining the Stock Return via a Macroeconomic Multi-Factor Model

This paper investigated the relationship between economic variables and stock returns in the industrial sector in Jordan. The study is conducted at monthly intervals over the six-and-half years period from July 1997 to 2003 using a value weighted average returns. Four variables were examined; Industrial production, expected inflation, unanticipated inflation and term structure. The evidence suggested that only two variables do really affect the stock return when considering the returns without its dividends, which are the expected inflation and the unanticipated inflation; while only one variable affects the stock returns when taking the dividends into consideration; this is the unanticipated inflation.In addition, this study examined if there is a long-run relationship or a short-run relationship between the unanticipated inflation and stock returns. The results showed that there is a long-run relationship between the two variables but there is no short-run relationship between them