Dow Jones commponents and economic indicators : a factor analysis approach

Abstract

This paper explores the relationships between economic indicators and movements in the Dow components returns. There have been numerous attempts to identify these relationships: the Arbitrage Pricing Theory (APT), one of these approaches, contributes directly to the mult(factor model. The theory, introduced by Ross in 19 7 6, has been a valuable approach to analyzing security returns because the APT allows analysts to study the effects of multiple influential factors . Factor analysis is then used to analyze these factors, a group of economic indicators, and a group of security returns. Factor analysis identifies a new set of uncorrelated variables for economic indicators, and another new set of uncorrelated variables for stock returns. This study provides additional support to the idea that the returns on securities are influenced both by the market, and by economic conditions.