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

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Author Info
Wayne E. Ferson
Campbell R. Harvey

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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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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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Find related papers by JEL classification:
F3 - International Economics - - International Finance
G1 - Financial Economics - - General Financial Markets

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.:

  1. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(3), pages 773-816. [Downloadable!] (restricted)
    Other versions:
  2. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September. [Downloadable!] (restricted)
  3. Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, vol. 32(3), pages 663-82, June. [Downloadable!] (restricted)
  4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  5. Campbell, John Y., 1987. "Stock returns and the term structure," Journal of Financial Economics, Elsevier, vol. 18(2), pages 373-399, June. [Downloadable!] (restricted)
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  6. French, Kenneth R. & Poterba, James M., 1991. "Were Japanese stock prices too high?," Journal of Financial Economics, Elsevier, vol. 29(2), pages 337-363, October. [Downloadable!] (restricted)
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  7. Giovannini, Alberto & Jorion, Philippe, 1989. " The Time Variation of Risk and Return in the Foreign Exchange and Stock Markets," Journal of Finance, American Finance Association, vol. 44(2), pages 307-25, June. [Downloadable!] (restricted)
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  8. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring. [Downloadable!] (restricted)
  9. Korajczyk, Robert A. & Viallet, Claude J., 1992. "Equity risk premia and the pricing of foreign exchange risk," Journal of International Economics, Elsevier, vol. 33(3-4), pages 199-219, November. [Downloadable!] (restricted)
  10. Bansal, Ravi & Hsieh, David A & Viswanathan, S, 1993. " A New Approach to International Arbitrage Pricing," Journal of Finance, American Finance Association, vol. 48(5), pages 1719-47, December. [Downloadable!] (restricted)
  11. Lehmann, Bruce N. & Modest, David M., 1988. "The empirical foundations of the arbitrage pricing theory," Journal of Financial Economics, Elsevier, vol. 21(2), pages 213-254, September. [Downloadable!] (restricted)
  12. Mark, Nelson C., 1985. "On time varying risk premia in the foreign exchange market: An econometric analysis," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 3-18, July. [Downloadable!] (restricted)
  13. Braun, Phillip A & Nelson, Daniel B & Sunier, Alain M, 1995. " Good News, Bad News, Volatility, and Betas," Journal of Finance, American Finance Association, vol. 50(5), pages 1575-1603, December. [Downloadable!] (restricted)
  14. Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, vol. 4(2), pages 129-176, March. [Downloadable!] (restricted)
  15. Mandelker, Gershon & Tandon, Kishore, 1985. "Common stock returns, real activity, money, and inflation: Some international evidence," Journal of International Money and Finance, Elsevier, vol. 4(2), pages 267-286, June. [Downloadable!] (restricted)
  16. Cho, D Chinhyung & Eun, Cheol S & Senbet, Lemma W, 1986. " International Arbitrage Pricing Theory: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 41(2), pages 313-29, June. [Downloadable!] (restricted)
  17. Campbell R. Harvey & Bruno Solnik & Guofu Zhou, 1994. "What Determines Expected International Asset Returns?," NBER Working Papers 4660, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Hamao, Yasushi, 1988. "An empirical examination of the Arbitrage Pricing Theory : Using Japanese data," Japan and the World Economy, Elsevier, vol. 1(1), pages 45-61, October. [Downloadable!] (restricted)
  19. René M Stultz, 1984. "Pricing Capital Assets in an International Setting: An Introduction," Journal of International Business Studies, Palgrave Macmillan Journals, vol. 15(3), pages 55-73, September. [Downloadable!] (restricted)
  20. Huberman, Gur & Kandel, Shmuel & Stambaugh, Robert F, 1987. " Mimicking Portfolios and Exact Arbitrage Pricing," Journal of Finance, American Finance Association, vol. 42(1), pages 1-9, March. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, 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.)

  1. Campbell R. Harvey, 1994. "Predictable Risk and Returns in Emerging Markets," NBER Working Papers 4621, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Wayne E. Ferson & Campbell R. Harvey, 1999. "Economic, Financial, and Fundamental Global Risk In and Out of the EMU," NBER Working Papers 6967, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Rui Albuquerque & Gregory Bauer & Martin Schneider, 2004. "International Equity Flows and Returns: A Quantitative Equilibrium Approach," International Finance 0405006, EconWPA. [Downloadable!]
    Other versions:
  4. Mahfuzul Haque & M. Kabir Hassan & Neal Maroney & William H. Sackley, 2004. "An empirical examination of stability, predictability and volatility of Middle Eastern and African emerging stock markets," Review of Middle East Economics and Finance, Taylor and Francis Journals, vol. 2(1), pages 19-42, April. [Downloadable!] (restricted)
    Other versions:
  5. Jeffrey A. Frankel, 1994. "The Internationalization of Equity Markets," NBER Working Papers 4590, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Rui Albuquerque & Gregory Bauer & Martin Schneider, 2004. "Characterizing Asymmetric Information in International Equity Markets," International Finance 0405005, EconWPA. [Downloadable!]
  7. Tom A. FEARNLEY, 2002. "Tests of an International Capital Asset Pricing Model with Stocks and Government Bonds and Regime Switching Prices of Risk and Intercepts," FAME Research Paper Series rp97, International Center for Financial Asset Management and Engineering. [Downloadable!]
  8. Albuquerque, Rui & Bauer, Gregor H & Schneider, Martin, 2006. "Global Private Information in International Equity Markets," CEPR Discussion Papers 5819, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  9. Geert Bekaert & Campbell R. Harvey, 1994. "Time-Varying World Market Integration," NBER Working Papers 4843, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Locarno, Alberto & Massa, Massimo, 2005. "Monetary Policy Uncertainty and the Stock Market," CEPR Discussion Papers 4828, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Jon A. Christopherson & Wayne E. Ferson & Debra A. Glassman, 1996. "Conditioning Manager Alphas on Economic Information: Another Look at the Persistence of Performance," NBER Working Papers 5830, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. Jose Antonio R. Tan, III, 1998. "Contagion effects during the Asian financial crisis: stock price data," Pacific Basin Working Paper Series 98-06, Federal Reserve Bank of San Francisco. [Downloadable!]
  13. Gregory H. Bauer & Clara Vega, 2006. "The monetary origins of asymmetric information in international equity markets," International Finance Discussion Papers 872, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  14. Charles Engel, 1993. "Tests of CAPM on an International Portfolio of Bonds and Stocks," NBER Working Papers 4598, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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