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Country and Industry Dynamics in Stock Returns

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  • Luis Catão
  • Allan Timmermann

Abstract

A perennial question in international finance is to what extent stock returns are influenced by country-location, as opposed to industry-affiliation, factors. This paper develops a novel methodology to measure these effects, in which portfolios mimicking "pure" country and industry factors are first constructed and their joint dynamics then modeled as regime-switching processes. Estimation using global firm-level data allows us to identify well-defined volatility states over the past thirty years and shows that the contribution of the industry factor becomes systematically more prominent during high global volatility states, while the country factor contribution declines. Using the model''s estimates, we find that portfolio diversification possibilities vary considerably across economic states.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/52.

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Length: 51
Date of creation: 01 Mar 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/52

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Keywords: Stock markets; Economic models; correlations; probabilities; stock returns; covariances; correlation; stock market; probability; covariance; time series; statistics; equation; financial economics; equity markets; number of parameters; financial markets; global stock market; international finance; econometrics; kurtosis; stock market capitalization; portfolio investment; stock market crash; international financial markets; significance level; samples; nonlinear model; linear model; standard deviations; standard errors; markov chain; dummy variable; international capital; predictability; emerging markets ? stocks; statistic; arithmetic; stock market indices; statistical test; descriptive statistics; hypothesis testing; statistical measures; international capital markets; stock market volatility; statistical significance; stock market capitalizations; bonds; random variables; standard deviation; estimation method; statistical methods; equity market; stock indices; bayesian information criterion; functional form;

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References

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Citations

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Cited by:
  1. Geert Bekaert & Robert J. Hodrick & Xiaoyan Zhang, 2005. "International Stock Return Comovements," NBER Working Papers 11906, National Bureau of Economic Research, Inc.
  2. Bai, Ye & Green, Christopher J. & Leger, Lawrence, 2012. "Industry and country factors in emerging market returns: Did the Asian crisis make a difference?," Emerging Markets Review, Elsevier, vol. 13(4), pages 559-580.
  3. Carrieri, Francesca & Errunza, Vihang & Sarkissian, Sergei, 2006. "The Dynamics of Geographic versus Sectoral Diversification: Is There a Link to the Real Economy?," Working Papers 06-4, University of Pennsylvania, Wharton School, Weiss Center.
  4. Fedorova, Elena, 2011. "Transfer of financial risk in emerging eastern European stock markets: A sectoral perspective," BOFIT Discussion Papers 24/2011, Bank of Finland, Institute for Economies in Transition.
  5. John Ammer & Jon Wongswan, 2007. "Cash Flows and Discount Rates, Industry and Country Effects and Co-Movement in Stock Returns," The Financial Review, Eastern Finance Association, vol. 42(2), pages 211-226, 05.

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