The effects of local and global risk factors on the S&P 500 stock returns: an empirical investigation

In this paper we examine the impact of several local and global risk factors on the stock returns of S&P 500 industries' indices by applying a multifactor arbitrage pricing model. The local macroeconomic factors are industrial production, inflation, changes of expected inflation, term structure, exchange rate and oil prices. We also employ a global version of a single factor model to test the effect of global risk factors proxied by the world market index on industries' stock returns. The industries chosen are banking, chemicals, insurance, telecommunication and utilities. The results based on the multifactor model show that local risk factors have a strong explanatory power in explaining the variations of the monthly excess return of the S&P 500 index. A significant relationship is found between local risk factors and the industries' stock returns. Our findings also show a significant positive beta coefficient associated with the world equity index related to each industry.