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What Factors Drive Global Stock Returns?

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  • Hou, Kewei

    (Ohio State U)

  • Karolyi, G. Andrew
  • Kho, Bong Chan

    (Seoul National U)

Abstract

This study seeks to identify which factors are important for explaining the time-series and cross-section variation in global stock returns. We evaluate firm characteristics, like size, earnings/price, cash flow/price, dividend/price, book-to-market equity, leverage, momentum, that have been suggested in the empirical asset pricing literature to be cross-sectionally correlated with average returns in the United States and in developed and emerging markets around the world. For monthly returns of 26,000 individual stocks from 49 countries over the 1981 to 2003 period, we perform cross-sectional regression tests of average returns at the individual firm level and we construct factor-mimicking portfolios based on these firm-level characteristics to assess their ability to explain time-series return variation in country, industry and characteristics-sorted portfolios. We find that the momentum and cash flow/price factor-mimicking portfolios, together with a global market risk factor, capture substantial common variation in global stock returns. In addition, the three factors explain the average returns for country and industry portfolios, and a wide variety of single- and double-sorted characteristics-based portfolios.

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File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2006/2006-9.pdf
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Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2006-9.

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Date of creation: May 2006
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Handle: RePEc:ecl:ohidic:2006-9

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Cited by:
  1. Andrikopoulos, Andreas & Angelidis, Timotheos & Skintzi, Vasiliki, 2012. "Illiquidity, return and risk in G7 stock markets: interdependencies and spillovers," MPRA Paper 40003, University Library of Munich, Germany.
  2. Lee, Kuan-Hui, 2011. "The world price of liquidity risk," Journal of Financial Economics, Elsevier, Elsevier, vol. 99(1), pages 136-161, January.
  3. Yao, Tong & Yu, Tong & Zhang, Ting & Chen, Shaw, 2011. "Asset growth and stock returns: Evidence from Asian financial markets," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 19(1), pages 115-139, January.
  4. Chua, Choong Tze & Lai, Sandy & Wu, Yangru, 2008. "Effective fair pricing of international mutual funds," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(11), pages 2307-2324, November.

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