Lagged Effect of Macroeconomic Variables on Stock Returns: A Case of Firm Size

The evidence of lagged effect regarding firm size between macroeconomic factors and stock returns is found with GARCH model for the UAE firms. More precisely, exchange rate showed a significant effect on stock returns irrespective of size group and lag level. However, a positive effect is observed at lag four and a negative effect is observed on lag five and two for small and large size firms respectively. For majority of the firms in small size, the risk-free rate showed a negative lagged effect on stock returns; however, for the majority of the firms in large size, it showed a positive lagged effect on stock returns. Inflation also showed a significant effect on stock returns on each lag level except for large firms where at lag five it is insignificant. Moreover, as the lags increase from 1- 4 and size from small to large, the negative effect of inflation converts to positive effect on stock returns. The lag effect of real activity showed both positive and negative effects on relatively larger stock returns of small firms than big firms. Money supply showed positive significant effect on stock returns of all firms irrespective of the size group; however, this relationship is even more prominent at lag five. Finally, the oil prices showed a positive effect on stock returns (large size) which further maximizes at lag two; whereas, a negative maximization takes place at lag three. Hence, investors can make informed and effective decisions and UAE policymakers developed effective measures to control and promote macroeconomic growth and stability.