Country and Industry Dynamics in Stock Returns
AbstractAn important question in international finance is to what extent stock return volatility is influenced by country location, industry affiliation, and global factors. This Paper develops a new methodology to measure these effects, in which portfolios mimicking ‘pure’ country and industry factors are first constructed and their joint dynamics then modelled as regime-switching processes. Applying this methodology to a uniquely long set of international firm level data, we identify well-defined high and low volatility states over the past 30 years, and show that the contribution of industry and country factors to stock return volatility varies markedly across such states. In particular, we find that the country factor contribution drops markedly when global equity market volatility rises, and that country return correlations become tighter when global and industry factors are both in a high volatility state. Key implications for global portfolio allocation are discussed.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4368.
Date of creation: Apr 2004
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- C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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