Country v sector effects in equity returns: Are emerging-market firms just small firms?
AbstractIn the debate whether country factors are typically more variable than sector factors, sparked obye. g. Roll (1991) and Heston and Rouwenhorst (1994), one of the few uncontested facts is that the addition of emerging markets (EMs) does boost the ratio of country-factor variance relative to industry-factor variance. Emerging markets do tend to have a higher variability but simultaneously are less related to global market and industry factors. We investigate to what extent this phenomenon can be traced to the impact of adding more small firms. We find, first, that small firms do have highe rvolatility, but one needs to control for country and sectora ÿliation before that becomes visible. We next find that small firms do have weaker sector affnity,as expected. Third, small firms unexpectedly have weaker local-market sensitivities than large firms. Facts 2 and 3 mean that adding more small firms to the database has adiversifying effect on both the sector-and country-factor variance; and while the impact on sector variance is larger, the net effect turns out to be tiny. Fourth, adding emerging markets has avery marked impact on the variance ratio. Infact, the addition of small stocks to the sample hardly dents the effect of adding EMs. Thus, the role of emerging markets cannot be reduced to just a small-firm phenomenon.
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Bibliographic InfoPaper provided by Katholieke Universiteit Leuven in its series Open Access publications from Katholieke Universiteit Leuven with number urn:hdl:123456789/120454.
Date of creation: 2007
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Control; Country; Database; Diversification; EMS; Expected; Factors; Firms; Impact; Industries; Industry; International stock returns; Market; Markets; Sector; Sensitivity; Small firms; Variability; Variance; World;
Other versions of this item:
- De Moor, Lieven & Sercu, Piet, 2007. "Country v Sector Effects in Equity Returns: Are Emerging-Market Firms just Small Firms?," Working Papers 2007/03, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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