Document Type : Original Research


Department of Finance and Accounting, City University College of Ajman, UAE


This study examines the role of firm nature of business effect (financial vs. non-financial) in determining the lagged effect of economic factors on stock returns. Study applied generalized autoregressive conditional heteroskedasticity model GARCH (1, 1). The results of the study indicate that with the increase in lags from lag one to lag five, the significant impact of exchange rate on stock returns of financial firms becomes more and more negative while for the non-financial firms, it becomes more and more positive (from lag one to lag four). Results further indicated that the negative significant relation of risk free rate with stock returns of both financial and non-financial firms is maximized at one lag. However, the negative significant relation of inflation with stock returns of financial firms is maximized at lag two while in the case of non-financial firms, it is maximized at lag one. In this vein, it is also found that with the increase in lags from lag one to lag four, for both the financial and non-financial firms, the significant impact of inflation on stock returns shifts from negative to positive. Moreover, the statistically significant and positive influence of real activity on stock returns is maximized at one lag, while in the case of non-financial firms; it is maximized at two lags. Further, results also reported that the maximization of significant positive influence of money supply on stock returns exists at fifth lag for both financial and non-financial firms. In addition, the significant impact of money supply on stock returns becomes more and more positive with the increases in lags from lag one to lag five. Focusing on oil prices, the results further established that two lags is the most common lag for the statistically significant and positive impact of oil prices on stock returns; while, three lags is the most common lag for negative and significant impact of oil prices on stock returns. Finally, we reveal that macroeconomic indicators have lagged effect that varies with respect to firm nature of business, representing the role of nature of business effect.


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