An application of co-integration technique for detecting influential risk factors of the Australian stock market

This paper identifies the influential risk factors for the Australian stock market by applying cointegration technique. Relevant a priori variables are used to proxy for Australian systematic risk factors. The quarterly data from 1983 to 2002 are used in the analysis. The linear combination of a priori variables is found co-integrated although not all variables are influential. The bank interest rate, corporate profitability, dividend yield, industrial production and, to a lesser extent, global market influence are significant for the Australian stock market returns in the long-run; while the stock prices are adjusted each quarter by its own market performance, interest rate and global stock market movements of previous quarter. This paper seems to have practical implications for both local and overseas investors as all investors now be able to manage their investment risks better while considering Australian stocks into their portfolios through monitoring only 4 to 5 factors that are identified here.