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We investigate the macroeconomic factors underlying stock returns in Hong Kong, an economy where there is no capital gain or dividend tax and no import-export tariff. We find that in addition to market, value and size factors, the unexpected components of GDP growth, industry production growth, inflation rate, and export growth systematically price stock returns. The significance of the negative pricing premiums of GDP growth and inflation rate vanishes after controlling for Fama and French’s three global factors because global capital can invest freely in Hong Kong’s stock market. However, the premium of unexpected export growth is still significantly negative which defies expectation because the Hong Kong economy had once been export dependent. Even more counter-intuitive is the finding that unexpected industry production growth continues to demand a significant negative pricing premium even after controlling for the global factors. _____________________________________________________________________________ We thank Nusret Cakici, Kalok Chan, Nai-Fu Chen, Gang Li, Mark Seasholes, Sheridan Titman, and K. C. John Wei for their helpful comments and discussions. We also acknowledge financial support from the Hong Kong University of Science and Technology. Normal disclaimers apply. |
