Research Paper Number 54 The Determinants of Stock Returns in a Small Open Economy Authors

This paper examines the determinants of stock returns in a small open economy using an APT framework. The analysis is conducted for the Swiss stock market which has the particularity of including a large proportion of firms that are exposed to foreign economic conditions. Both a statistical and a macroeconomic implementation of the model are performed for the period 1986-2002 with monthly ret urns on industrial sector indices. The results show that the statistically determined factors yield a better representation of the determinants of stock returns than the macroeconomic variables and that stock returns are influenced by both global and local economic conditions. This suggests that the Swiss stock market is an internationally imperfectly integrated market. Executive Summary: This paper provides an analysis of the determinants of stock returns in a small open economy in an APT framework. The empirical investigation is conducted for the Swiss stock market which has the particularity of including a large proportion of firms that are exposed to economic conditions prevailing outside the country as they sell and purchase their products and services overseas. As it is a developed market with no barriers to international investments, it could be considered as a market that is integrated with the rest of the world.