The Effect of Macroeconomic Variables on Market Risk Premium : Study of Sweden, Germany and Canada

Abstract: ABSTRACT Title The Effect of Macroeconomic Variables on Market Premium. Study of Sweden, Germany and Canada Authors Samira Allahyari Westlund Arad Tahmidi Dmytro Sheludchenko Supervisor Christos Papahristodoulou Key words Macroeconomic, market risk premium, GDP, inflation, money supply, primary net lending and net borrowing, regression analysis. Institution Mälardalen University School of Sustainable Development of Society and Technology Box 883, SE-721 23 Västerås Sweden Course Bachelor Thesis in Economics (NAA 301), 15 ECTS Problem statement Risk premium value is of great interest to the financial world, since this value represents the extra return that investors receive considering the risk from investing in financial markets. The fluctuations in stock markets are believed to be influenced by changes in macroeconomic variables. Purpose The purpose of this paper is to analyze the effect of macroeconomic variables on and their relation to market risk premium in Canada, Sweden and Germany in the years 1992 – 2007. Method Multiple Regression Analysis, Ordinary Least squares (OLS) Result Forecasted Growth in real GDP is the only macroeconomic variable which has significant relation with market risk premium. The effect of money supply was found to be insignificant. Net lending and net borrowing had significant negative effect on market risk premium in Canada, whereas in Germany and Sweden the relationship was not significant.