Factors and Risk Premia in Individual International Stock Returns
Swiss Finance Institute Research Paper No. 18-04
HEC Paris Research Paper No. FIN-2018-1250
Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC
Forthcoming in Journal of Financial Economics
87 Pages Posted: 7 Feb 2020 Last revised: 18 Aug 2020
Date Written: January 15, 2020
Abstract
We propose an estimation methodology tailored for large unbalanced panels of individual stock returns to study the factor structure and expected returns in international stock markets. We show that the local market is necessary to capture the factor structure in both developed and emerging markets. Neither the presence of multiple world risk factors, regional risk factors, systematic currency risk factors, nor a country-specific currency subsumes the importance of the local market factor. All factors, including the local market, carry significant risk premia across a large proportion of countries. The contribution of pricing errors to total expected returns is large and time-varying.
Keywords: approximate factor model, emerging markets, international asset pricing, large panel, market integration, time-varying risk premium
JEL Classification: C12, C13, C23, C51, C52 , G12, G15
Suggested Citation: Suggested Citation