PRICING OF LOCAL SOURCES OF RISK ON INDUSTRY RETURNS: EMPIRICAL EVIDENCE FROM THE UNITED KINGDOM

Mahdy F. Elhusseiny
California State University Bakersfield
Ashraf M. Attia
State University of New York at Oswego
Khalid A Almurshidee
Qassim University
ABSTRACT
The objective of this study is to identify and examine the extent to which key
macroeconomic factors are reflected in the performance of stock returns in different
industries in the United Kingdom (U.K), and if so, to what extent? Therefore, this study
employs a multifactor pricing model to investigate industry stock returns. For the purpose of
this study, several local macroeconomic risk factors are constructed: industrial production,
inflation, change of expected inflation, term structure, foreign exchange rate, and oil prices.
In addition to the returns on the national equity market portfolio, the available returns of the
five U.K different industries, insurance, telecommunications, banking, chemicals, and utilities
are examined. The results reveal correlations between local sources of risk and industry stock
returns. Local risk factors prove to be important toward explaining variations in excess
returns for U.K. industries. It was determined that local market excess return has major
influence on industry returns for all industries investigated.