Stock excess returns, risk, and business conditions: empirical analyses of industry portfolios

Shuh-Chyi Doong

doi:10.17918/00000664

The objective of this dissertation is to provide the first attempt to make detailed analyses on the time series behavior of industry portfolios. More specifically, this dissertation opens a new avenue for exploring the relationship between risks and excess returns on the industry level and gives the practitioners insight into the time series properties of industry excess returns and volatilities. According to the preliminary analyses, the evidence shows that there are different behaviors of industry returns across industries. The evidence also shows that for most industry portfolios, the average means and volatilities are significantly different from the market portfolio. In trying to find the sources that cause different industry portfolios to behave differently, the first approach is to investigate how industry excess returns respond to the change in macroeconomic information. The second approach is to look directly at the systematic risk measures of different industries. Finally, I provide additional insight into the nature of time-varying excess returns and their relationship with the different kinds of risks on the industry level. In general, all the industry excess returns are significantly related to at least one state variable. However, the exposure to the change in macroeconomic information may not be the same for all industries. Another important finding is that business conditions can affect the responses of industry excess return to the economic indicators. In particular, the industry excess returns are more sensitive to the change of economic indicators when the economy is in recession. I also find that the systematic risks of industries are not constant over time. In addition, the large shocks in industry betas seem to be associated with business conditions, particularly around turning points and during recession period. Among all the risks I considered, the unexpected market volatility is the most important factor in explaining the movements of industry excess returns. This dissertation provides a means of disaggregating the whole stock market into industry analyses. Investors may find answers here if they want to avoid some of the risks attached to investments and to detect new opportunities. Moreover, business managers who quickly recognize a change in macroeconomic information or special events could launch either a recession or an expansion strategy to optimize the value of the company. Finally, economists can gain more knowledge and build up more general theoretical models to make a further contribution to the industry area.

Stock excess returns, risk, and business conditions: empirical analyses of industry portfolios

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Stock excess returns, risk, and business conditions: empirical analyses of industry portfolios

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