Macroeconomic exposure of Swedish firms’ revenue and its impact on stock returns

Previous research suggests that by examining the regional origins of revenues and the expected economic growth in regions, supra-normal returns may be achieved by creating zero investment portfolios. Nevertheless, such previous research examines countries with low export dependence and a high internal demand or uses data from a number of countries with di↵erent economic dependencies. The purpose of this paper is to study the same field of research, as in existing research, however using data solely from Sweden. Sweden is an economy reliant on export with a market that houses less internal demand than the other countries examined. We investigate the macroeconomic exposure of Swedish firms’ revenue together with growth expectations where they face exposure. Based on this exposure and the expected future economic growth we created a variable, exposureit, to help explain stock returns. Based on the relationship between our variable and stock returns, we create two zero investment portfolios to try and achieve abnormal returns. We find that for Swedish firms, expected future economic growth has a negative correlation with stock returns, and by following this result the portfolio that takes a long position in stocks with a low exposureit and a short position in high exposureit was able to generate the highest return for the period. We further conclude that it is not possible to achieve abnormal returns based on this strategy.