The Stock Market Perception of Industry Risk Through the Utilization of a General Multifactor Model

The aim of this paper is to apply a multifactor model to analyse the determinants of the risk-return relationship of US listed water transportation stocks and thereafter compare them with the corresponding determinants of other transport industries such as air transportation, rail transportation and trucks, and non-transport industries such as electricity, gas, petroleum refining and real estate over the period July 1985-June 1995. This analysis is done by estimating the sensitivities of a set of predetermined micro and macro economic factors to the cross-sectional differences in the returns of the companies in each industry. The set of the predetermined factors consists of micro and macro economic variables utilised in previous research and includes: the market value of equity (size); the book-to-market value of equity ratio; the earnings-to-price ratio; the asset-to-market value of equity ratio; and the asset-to-book value of equity ratio while the macro economic factors utilised are: industrial production; the term structure of interest rates; oil prices; consumption; and inflation. The relationship between the aforementioned factors and industry returns is established by employing the Seemingly Unrelated Regression Model (SURM). Important findings of this paper are: Firstly, micro and macro economic factors have a significant role to play in explaining the cross-section of industry stock returns. Secondly, the returns of different industries are explained by different sets of macro and micro economic factors