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An Exploratory Investigation of the Fundamental Determinants of National Equity Market Returns

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  • Wayne E. Ferson
  • Campbell R. Harvey

Abstract

This paper studies average and conditional expected returns in national equity markets, and their relation to a number of fundamental country attributes. The attributes are organized into three groups. The first is relative valuation ratios, such as price-to-book-value, cash-flow, earnings and dividends. The second group measures relative economic performance and the third measures industry structure. We find that average returns across countries are related to the volatility of their price-to-book ratios. Predictable variation in returns is also related to relative gross domestic product, interest rate levels and dividend-price ratios. We explore the hypothesis that cross-sectional variation in the country attributes proxy for variation in the sensitivity of national markets to global measures of economic risks. We test single-factor and two-factor models in which countries' conditional betas are assumed to be functions of the more important fundamental attributes.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4595.

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Date of creation: Dec 1993
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Publication status: published as The Internationalization of Equity Markets, Jeffrey A. Frankel, ed., pp. 59-138, (Chicago: University of Chicago Press: 1994).
Handle: RePEc:nbr:nberwo:4595

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  1. Wayne E. Ferson & Campbell R. Harvey, 1994. "Sources of Risk and Expected Returns in Global Equity Markets," NBER Working Papers 4622, National Bureau of Economic Research, Inc.
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