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On the Construction of Common Size, Value and Momentum Factors in International Stock Markets: A Guide with Applications

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Abstract

Demand is growing for a better understanding of how assets are priced in countries outside of the U.S. While financial data are available for many firms world-wide, it is important to have a reliable and replicable method of constructing high-quality systematic risk factors from these data. This paper first documents that appropriately screened data from Thomson Reuters Datastream and Thomson Reuters Worldscope can be used to replicate closely not only U.S. market returns and the corresponding momentum risk factor (as existing work has suggested), but also the widely-used U.S. size and value risk factors. We then build novel pan-European and country-specific momentum, size, and value risk factors. By comparing our pan-European market returns and risk factors with their counterparts in the U.S., we find that they are astonishingly highly correlated. The factors we compute are made available to other researchers.

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Bibliographic Info

Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 11/141.

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Length: 55 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:eth:wpswif:11-141

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Keywords: Risk factors; value; size; momentum; international equity markets; asset pricing anomalies;

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Cited by:
  1. Lucas Bretschger & Filippo Lechthaler, 2012. "Common Risk Factors and the Macroeconomy: New Evidence from the Japanese Stock Market," CER-ETH Economics working paper series, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich 12/160, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  2. Peter S. Schmidt & Therese Werner, 2012. "Channeling the final Say in Politics," CER-ETH Economics working paper series, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich 12/165, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  3. ANNAERT, Jan & DE CEUSTER, Marc & VERSTEGEN, Kurt, 2012. "Are extreme returns priced in the stock market? European evidence," Working Papers 2012018, University of Antwerp, Faculty of Applied Economics.
  4. Rathner, Sebastian, 2013. "The Relative Performance of Socially Responsible Investment Funds. New Evidence from Austria," Working Papers in Economics and Finance, University of Salzburg 2013-1, University of Salzburg.
  5. Janick Christian Mollet & Andreas Ziegler, 2012. "Is Socially Responsible Investing Really Beneficial? New Empirical Evidence for the US and European Stock Markets," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201228, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  6. Białkowski, Jędrzej & Bohl, Martin T. & Kaufmann, Philipp & Wisniewski, Tomasz P., 2013. "Do mutual fund managers exploit the Ramadan anomaly? Evidence from Turkey," Emerging Markets Review, Elsevier, Elsevier, vol. 15(C), pages 211-232.
  7. Bohl, Martin T. & Kaufmann, Philipp & Stephan, Patrick M., 2013. "From hero to zero: Evidence of performance reversal and speculative bubbles in German renewable energy stocks," Energy Economics, Elsevier, Elsevier, vol. 37(C), pages 40-51.
  8. Hanauer, Matthias & Kaserer, Christoph & Rapp, Marc Steffen, 2011. "Risikofaktoren und Multifaktormodelle für den Deutschen Aktienmarkt (Risk Factors and Multi-Factor Models for the German Stock Market)," CEFS Working Paper Series 2011-01, Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München.
  9. Martin Bohl & Philipp Kaufmann & Patrick Stephan, 2012. "From Hero to Zero: Evidence of Performance Reversal and Speculative Bubbles in German Renewable Energy Stocks," CQE Working Papers, Center for Quantitative Economics (CQE), University of Muenster 2412, Center for Quantitative Economics (CQE), University of Muenster.

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