We estimate a latent factor model that decomposes international stock returns into global, country-, and industry-specific shocks and allows for stock-specific exposures to these shocks. We find that across stocks there is substantial dispersion in these exposures, which is partly explained by the extent to which firms operate across countries. We show that portfolios consisting of stocks with low exposures to country shocks achieve substantial variance reduction relative to the global market, both in- and out-of-sample. The shock exposures are thus a stock-selection device for international portfolio diversification.
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Paper provided by International Monetary Fund in its series IMF Working Papers with number
05/52.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Gordon M. Bodnar & Bernard Dumas & Richard C. Marston, 2002.
"Pass-through and Exposure,"
Journal of Finance,
American Finance Association, vol. 57(1), pages 199-231, 02.
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