A Latent Factor Model with Global, Country, and Industry Shocks for International Stock Returns
Abstract
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.Download Info
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Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/52.Length: 61
Date of creation: 01 Mar 2005
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Handle: RePEc:imf:imfwpa:05/52
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Related research
Keywords: Industrial structure; Risk premium; Export diversification; Stock markets; Economic models;This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-22 (All new papers)
- NEP-FMK-2005-10-22 (Financial Markets)
- NEP-RMG-2005-10-22 (Risk Management)
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Barbara Pfeffer, 2006. "Trade Policy and Risk Diversification," Volkswirtschaftliche Diskussionsbeiträge 126-06, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
- Michele Campolieti & Deborah Gefang & Gary Koop, 2013. "A New Look at Variation in Employment Growth in Canada: The Role of Industry, Provincial, National and External Factors," Working Papers 26145565, Lancaster University Management School, Economics Department.
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