Innovative Macroeconomic Value Determinants

Abstract

In this paper, we test a captivating proposition that the innovative (difference) and interactive terms of macroeconomic variables significantly improve our understanding of the stock return movements. We revisit a prominent issue on the association of the stock return with macroeconomic variables such as default risk premium, term structure of interest rates, growth in GDP and inflation and provide an innovative perspective on the obsolete issue. Using the S&P 500 Industrial Composite Index, we report that the innovative and interactive terms of the variables appear to be significant determinants of the stock return. Our findings suggest that other return models take the innovative and interaction effects into account.