RISK FACTORS AND INDUSTRY STOCK RETURNS: AN EMPIRICAL EXAMINATION OF THEUAE AND USA STOCK MARKETS

Abstract

This study attempts to test the effects of several risk factors on industries’ stock returns in UAE and
USA by employing a multifactor pricing model. This study addresses three main questions. First,
whether and to what extent are returns on local industries affected by changes in local macroeconomic
risk factors? Second, whether and to what extent are there similarities and differences in different
industries? Third, whether and to what extent are there similarities and differences in different
markets? We examine returns of seven industries: banking, consumer staples, industrial, insurance,
real estates, telecommunication, and transportation for which data is available. Empirical results
indicate different relationships between macroeconomic risk factors and industries’ stock returns in
each market. The results also show that some industries show more differences than others between
the two markets in their stock reactions to local macroeconomic risk factors. However, all the
industries in the two markets show strong reactions to local market portfolios.