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Are practitioners right? On the relative importance of industrial factors in international stock returns

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Author Info
Dušan Isakov (HEC-University of Geneva and FAME)
Frédéric Sonney (HEC-University of Geneva, University of Neuchâtel and FAME)

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Abstract

This paper investigates the relative influences of industrial and country factors in international stock returns. Until very recently, academic research has consistently found that country factors dominate industrial factors. This result is in contradiction with practitioners beliefs. This paper re-examines this issue by analyzing a sample of more than 4000 stocks quoted in 20 developed countries. We find that on average the country effect still dominates stock returns over the period 1997-2000. This result has to be interpreted with caution though, as an analysis that allows for time-varying relative influences demonstrates the rapidly increasing impact of industry effects in recent times. We find, in particular, that this trend is common to all 20 developed countries considered and not only to those that are members of the European Monetary Union. We interpret this result as evidence of the increasing globalization of international equity markets.

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Publisher Info
Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp72.

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Date of creation: Feb 2003
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Handle: RePEc:fam:rpseri:rp72

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Related research
Keywords: International stock markets industries global factors diversification

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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  1. Beckers, Stan & Grinold, Richard & Rudd, Andrew & Stefek, Dan, 1992. "The relative importance of common factors across the European equity markets," Journal of Banking & Finance, Elsevier, vol. 16(1), pages 75-95, February. [Downloadable!] (restricted)
  2. Bolliger, Guido, 2004. "The characteristics of individual analysts' forecasts in Europe," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2283-2309, September. [Downloadable!] (restricted)
  3. Kennedy, Peter, 1986. "Interpreting Dummy Variables," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 174-75, February. [Downloadable!] (restricted)
  4. Griffin, John M. & Andrew Karolyi, G., 1998. "Another look at the role of the industrial structure of markets for international diversification strategies1," Journal of Financial Economics, Elsevier, vol. 50(3), pages 351-373, December. [Downloadable!] (restricted)
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  5. Meyers, Stephen L, 1973. "A Re-Examination of Market and Industry Factors in Stock Price Behavior," Journal of Finance, American Finance Association, vol. 28(3), pages 695-705, June. [Downloadable!] (restricted)
  6. Roll, Richard, 1992. " Industrial Structure and the Comparative Behavior of International Stock Market Indices," Journal of Finance, American Finance Association, vol. 47(1), pages 3-41, March. [Downloadable!] (restricted)
  7. Suits, Daniel B, 1984. "Dummy Variables: Mechanics v. Interpretation," The Review of Economics and Statistics, MIT Press, vol. 66(1), pages 177-80, February. [Downloadable!] (restricted)
  8. Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, vol. 36(1), pages 3-27, August. [Downloadable!] (restricted)
  9. Kuo, Weiyu & E. Satchell, Stephen, 2001. "Global equity styles and industry effects: the pre-eminence of value relative to size," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 11(1), pages 1-28, March. [Downloadable!] (restricted)
  10. Lessard, Donald R, 1974. "World, National, and Industry Factors in Equity Returns," Journal of Finance, American Finance Association, vol. 29(2), pages 379-91, May. [Downloadable!] (restricted)
  11. K. Geert Rouwenhorst, 1998. "European Equity Markets and EMU: Are the Differences Between Countries Slowly Disappearing?," Yale School of Management Working Papers ysm103, Yale School of Management. [Downloadable!]
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