DOW JONES COMPONENTS AND ECONOMIC INDICATORS: A FACTORANALYSISAPPROACH

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 multifactor model. The theory, introduced by Ross in 1976, has been a valuable approach to analyzing security returns because the APT allows analysts to study the effects ofmultiple influentialfactors. Factor analysis is then used to analyze thesefactors, a group ofeconomic indicators, and a group ofsecurity returns. Factor analysis identifies a new set ofuncorrelated variablesfor economic indicators, and another new set ofuncorrelated variablesfor stock returns. This studyprovides additional support to the idea that the returns on securities are influenced both by the market, and by economic conditions.