The Intertwining of Sectoral Stock Market Volatility and Macroeconomic Fundamentals - A study of Sweden's sectoral indices

Sammanfattning: The stock market has come to play a larger role in many people's lives as years pass and its accessibility has come to be exponentially easier for many. Investment in publicly listed companies has become a foundation of saving and a way of managing wealth for the general public. Even though the stock market permeates many of our daily lives and is heavily monitored and regulated, there is still uncertainty on how and what factors pave the way for changes on the stock market. One factor, often brought up in literature, is the effect of fundamental macroeconomics on the volatility on the stock market. The purpose of this thesis is to explore and delve deeper into the stock market volatility, specifically, discrepancies between sectors and the explanatory power of changes in fundamental macroeconomic variables. To study the explanatory power of fundamental macroeconomics for the volatility of the sectoral indices, a heterogeneous autoregressive model of the realized volatility, HAR-RV, is used. We run the regressions on 11 sectoral indices, classified by the GICS, as well as OMX All-Share together with both lagged indices and 4 different macroeconomic variables as explanatory variables, inflation, industrial production, short- and long term interest rate. The result of the thesis shows that there exists discrepancies between how the sectoral volatility can be explained by changes in fundamental macroeconomics, and what variables carry the most explanatory power. We also find evidence of a consistent significant relationship between volatility and long-term interest rates. Furthermore, sectors that are more sensitive to the business cycle are generally more responsive to changes in the IPI. We find low evidence of a relationship between both inflation and short-term interest rates to sectoral volatility, with the exception of a few outliers.