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Economic, Financial, and Fundamental Global Risk In and Out of the EMU

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  • Wayne E. Ferson
  • Campbell R. Harvey

Abstract

We explore the different factors that drive expected returns in world markets. Our research offers two innovations. First, the introduction of the Euro currency unit greatly reduces the complexity of including foreign exchange risk in asset pricing models. We use a synthetic Euro excess return along with a Yen excess return to assess country equity sensitivities to currency risk factors. Second, when combining the currency factors with a group of economic factors, we measure the incremental information in the factor proposed in Fama and French (1998). We find that a global price-to-book factor offers little additional explanatory power over and above a model that includes economic risk factors.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6967.

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Date of creation: Feb 1999
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Publication status: published as Swedish Economic Policy Review, Vol. 6 (1999): 123-184.
Handle: RePEc:nbr:nberwo:6967

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  1. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(2), pages 385-415, April.
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  6. Wayne Ferson & Campbell R. Harvey, 1994. "An Exploratory Investigation of the Fundamental Determinants of National Equity Market Returns," NBER Chapters, National Bureau of Economic Research, Inc, in: The Internationalization of Equity Markets, pages 59-147 National Bureau of Economic Research, Inc.
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Cited by:
  1. Attiya Y. Javid & Eatzaz Ahmad, 2008. "Test of Multi-moment Capital Asset Pricing Model: Evidence from Karachi Stock Exchange," PIDE-Working Papers, Pakistan Institute of Development Economics 2008:49, Pakistan Institute of Development Economics.
  2. Mateus, Tiago, 2004. "The risk and predictability of equity returns of the EU accession countries," Emerging Markets Review, Elsevier, Elsevier, vol. 5(2), pages 241-266, June.
  3. Javid, Attiya Yasmin & Ahmad, Eatzaz, 2008. "Testing multifactor capital asset pricing model in case of Pakistani market," MPRA Paper 37341, University Library of Munich, Germany.
  4. González, M. & Minguez, R., 2005. "The Method Of Simulated Maximum Likelihood For The Estimaton Of Dynamic Ordered Probit: An Application To Country-Risk For Non-Developed Countries," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, Euro-American Association of Economic Development, vol. 2(3), pages 99-133.
  5. Lim, G.C., 2005. "Currency risk in excess equity returns: a multi time-varying beta approach," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 15(3), pages 189-207, July.
  6. Marina Emiris, 2002. "Measuring capital market integration," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 200-221 Bank for International Settlements.
  7. Jonathan Fletcher & Andrew Marshall, 2005. "An Empirical Examination of U.K. International Unit Trust Performance," Journal of Financial Services Research, Springer, Springer, vol. 27(2), pages 183-206, April.
  8. Attiya Y. Javid & Eatzaz Ahmad, 2008. "The Conditional Capital Asset Pricing Model: Evidence from Karachi Stock Exchange," PIDE-Working Papers, Pakistan Institute of Development Economics 2008:48, Pakistan Institute of Development Economics.
  9. Fletcher, Jonathan, 2001. "An examination of predictable risk and return in UK stock returns," Journal of Economics and Business, Elsevier, Elsevier, vol. 53(6), pages 527-546.
  10. Javid, Attiya Yasmin, 2008. "Time Varying Risk Return Relationship: Evidence from Listed Pakistani Firms," MPRA Paper 37561, University Library of Munich, Germany.
  11. Fletcher, Jonathan & Hillier, Joe, 2005. "An examination of linear factor models in country equity asset allocation strategies," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 45(4-5), pages 808-823, September.
  12. Javid, Attiya Yasmin, 2008. "Forecasting performance of capital asset pricing models in case of Pakistani market," MPRA Paper 37562, University Library of Munich, Germany.
  13. Hooper, Vince & Sim, Ah Boon & Uppal, Asfandyar, 2009. "Governance and stock market performance," Economic Systems, Elsevier, Elsevier, vol. 33(2), pages 93-116, June.

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