Systematic Risk Factors in European Infrastructure Stock Markets

This paper is the first to investigate the systematic risk factors driving European infrastructure equity returns using traditional asset pricing models. As infrastructure companies are exposed to specific risks such as regulatory changes, a lack of product diversification and construction risks, the pricing should differ substantially from that of general equities. Further differences are expected, due to the monopolistic environment in which many infrastructure companies operate. The major issue researchers face when analyzing infrastructure stocks is the lack infrastructure indices with a sufficiently high number of constituents and data history. Therefore, the data sample will be constructed by retrieving all dead and active European stocks and subsequently filtering them, based on the Standard Industrial Classification (SIC). Accordingly, only stocks in the sectors of telecommunication, transport and utilities are chosen. As the industry definitions include a large variety of economic activities in the infrastructure sectors, such as service or product suppliers, the sample needs to be screened in a second step for companies that focus mainly on "pure" infrastructure business. This screening will be conducted on the basis of the business descriptions retrieved from various data sources, such as Datastream and Google Finance and annual reports (asset test and revenue test). As indicated, the body of literature on asset pricing studies of infrastructure equities is very limited. This is surprising, since investor appetite for infrastructure investments and has grown significantly over the past few years. Consequently, this paper contributes to our understanding of infrastructure equities. Portfolio managers and investors can draw on the findings, in order to manage their risk exposure more efficiently.