Title: The information content of stock market factors
Authors: David McMillan - University of Stirling (United Kingdom) [presenting]
Abstract: The information content within several popular stock market factors is examined. Specifically, do they contain independent explanatory power for stock returns and are their movements related to economic variables. Given the explosion in the number of such factors, it is important to consider whether each factor adds to our understanding of markets and the wider economy. We undertake three related exercises, whether a set of popular factors contain independent predictive ability for stock return portfolios, what economic and market variables can explain movements in the factors and whether stock market factors have predictive power for future output growth. The results support the view that while many factors are suggested in the literature, they do not necessarily contain independent information for stock returns. Further, most of these factors do not provide any predictive power for future output growth and thus may not contain any information with regard to economic behaviour although it is apparent is that movement in the factors is driven by considerations of current economic and market risk. Hence, stock market factors reflect existing economic conditions but do not provide a window on future behaviour.