Do macroeconomic factors matter for stock returns? Evidence from estimating a multifactor model on the Croatian market

Factor models observe the sensitivity of an asset return as a function of one or more factors. This paper ana- lyzes returns on fourteen stocks of the Croatian capi- tal market in the period from January 2004 to October 2009 using inflation, industrial production, interest rates, market index and oil prices as factors. Both the direc- tion and strength of the relation between the change in factors and returns are investigated. The analyses included fourteen stocks and their sensitivities to fac- tors were estimated. The results show that the market index has the largest statistical significance for all stocks and a positive relation to returns. Interest rates, oil prices and industrial production also marked a positive relation to returns, while inflation had a negative influence. Fur- thermore, cross-sectional regression with the estimated sensitivities used as independent variables and returns in each month as dependent variables is performed. This analysis resulted in time series of risk premiums for each factor. The most important factor affecting stock prices proved to be the market index, which had a positive risk premium. A statistically significant factor in 2004 and 2008 was also inflation, marking a negative risk premium in 2004 and a positive one in 2008. The remaining three factors have not shown as significant.