Literature Review

The S&P market index returns and Department of Defense expenditures are both significantly
positively related to aerospace stock returns, but the other variables have insignificant
influence on aerospace stock returns. This evidence is further confirmed by the results from
additional regression analysis. Of particular interest is the finding that the monthly volume of
aircraft shipments is, as expected, positively related to stock returns, but the relationship is not
statistically significant in any aerospace company model (Bae & Duvall, 1996) .Bae And
Duvall (1996) suggest that a multi index CAPM using selected economic and industry
variables provides additional power in explaining the variability of U.S. aerospace stock
returns over a single index model using the market index alone.

According to Li (2002) Empirical results indicate that the major trends in stock-bond
correlation are determined primarily by uncertainty about expected inflation. Unexpected
inflation and the real interest rate are significant to a lesser degree.Forecasting this stock-bond
correlation using macroeconomic factors also helps improve investors’ asset allocation
decisions. One implication of this link between trends in stock-bond correlation and inflation
risk is the Murphy’s Law of Diversification(Li, 2002).

We find, in particular, that this trend is common to all 20 developed countries considered and
not only to those that are member of the European Monetary Union. We interpret this result as
evidence of the increasing globalization of international equity markets (Isakov & Sonney,
2003).

We find that changes in returns in Singapore, Malaysia and Indonesia before the 1997 crisis,
and changes in Singapore, the Philippines and Korea after 1997 instantaneously influenced
returns in the Thai stock market; changes in oil prices negatively impacted on it only prior to
1997;volatility clustering and a GARCH-M model were present only before 1997; and
markets outside the region had no immediate impact on the Thai market(Chancharat et al.,
2007)

It is found that economic exposure is higher at industry level than firm level stock returns.
Results also indicate that stock returns of different firms behave differently in similar
economic conditions that acquaint investors about the risk diversification opportunity in the
stock market (Butt et al., 2010). As Butt et al.(2010) states that market return is mainly
accounts variation in stock returns, however the inclusion of other macroeconomic and
industry related variables has added additional explanatory power in describing the stock
returns variation.

Bae, S. C., & Duvall, G. J. (1996). An empirical analysis of market and industry factors In stock returns
of US aerospace industry. Journal of Financial and Strategic Decisions, 9(2), 85-95.
Butt, B. Z., ur Rehman, K., Khan, M. A., & Safwan, N. (2010). Do economic factors influence stock
returns? A firm and industry level analysis. African Journal of Business Management, 4(5),
583-593.
Chancharat, S., Valadkhani, A., & Havie, C. (2007). The influence of international stock markets and
macroeconomic variables on the Thai stock market. Applied Econometrics and International
Development, 7(1).
Isakov, D., & Sonney, F. (2003). Are practitioners right? On the relative importance of industrial
factors in international stock returns. On the Relative Importance of Industrial Factors in
International Stock Returns (February 2003).
Li, L. (2002). Macroeconomic factors and the correlation of stock and bond returns. Available at SSRN
363641.