Aspects of asset pricing in the Australian equity market: January 1974 to December 2000

This thesis analyses the impact of 17 pre specified macroeconomic variables on Australian stock returns, at monthly intervals, over the period from January, 1974 to December 2000, at both an aggregate level and sectoral/industrial level. The economic variables were chosen on the basis of their ability to pervasively impact on stock returns. This period is also sub divided into three sub periods (1974 to 1983; 1984 to 1989 and 1990 to 2000). Results suggest that the identity and number of variables impacting on Australian stock returns changed during this period for both aggregate returns and the sectoral/industrial returns. The same conclusion is reached when the variable beta model of Abell and Krueger (1989) is employed in the analysis. On the basis of the findings presented in this thesis, it can be tentatively concluded that a factor model can be used to explain Australian equity returns. The thesis also analyses the impact of downside beta risk within the context of both the domestic market and the international market. The results indicate, less conclusively, that during each of the sub periods the number of industries whose returns moved in line with the (downside) world return progressively increased, indicating an increased degree of integration of the Australian stock market with the world stock market over this period.