The determinants of stock returns in a small open economy

This paper examines the determinants of stock returns in a small open economy using an APT framework. We focus on the Swiss stock market whose feature is to include a large proportion of firms that are exposed to foreign economic conditions. Both a statistical and a macroeconomic implementation of the model are performed on industrial sector indices for the period 1986–2002. It is found that statistical factors yield a better representation of the determinants of stock returns than macroeconomic variables. Stock returns are influenced by both global and local economic conditions, suggesting that the Swiss market is an internationally imperfectly integrated market.