Fundamental Determinants of National Equity Market Returns: A Perspective on Conditional Asset Pricing

53 Pages Posted: 15 Jul 2000 Last revised: 8 Jul 2022

See all articles by Wayne E. Ferson

Wayne E. Ferson

University of Southern California; National Bureau of Economic Research (NBER)

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Date Written: December 1996

Abstract

This paper provides a global asset pricing perspective on the debate over the relation between predetermined attributes of common stocks, such as ratios of price-to-book-value, cash-flow, earnings, and other variables to the future returns. Some argue that such variables may be used to find securities that are systematically undervalued by the market, while others argue that the measures are proxies for exposure to underlying economic risk factors. It is not possible to distinguish between these views without explicitly modeling the relation between such attributes and risk factors. We present an empirical framework for attacking the problem at a global level, assuming integrated markets. Our perspective pulls together the traditional academic and practitioner viewpoints on lagged attributes. We present new evidence on the relative importance of risk and mispricing effects, using monthly data for 21 national equity markets. We find that the cross-sectional explanatory power of the lagged attributes is related to both risk and mispricing in the two-factor model than mispricing.

Suggested Citation

Ferson, Wayne E. and Harvey, Campbell R., Fundamental Determinants of National Equity Market Returns: A Perspective on Conditional Asset Pricing (December 1996). NBER Working Paper No. w5860, Available at SSRN: https://ssrn.com/abstract=225645

Wayne E. Ferson (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

HOME PAGE: http://www-rcf.usc.edu/~ferson/

National Bureau of Economic Research (NBER)

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Campbell R. Harvey

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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