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What Factors Drive Global Stock Returns?

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  • Kewei Hou
  • G. Andrew Karolyi
  • Bong-Chan Kho

Abstract

Using monthly returns for over 27,000 stocks from 49 countries over a three-decade period, we show that a multifactor model that includes factor-mimicking portfolios based on momentum and cash flow-to-price captures significant time-series variation in global stock returns, and has lower pricing errors and fewer model rejections than the global CAPM or a popular model that uses size and book-to-market factors. We find reliable evidence that the global cash flow-to-price factor is related to a covariance risk model. In contrast, we reject the covariance risk model in favor of a characteristic model for size and book-to-market factors. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Kewei Hou & G. Andrew Karolyi & Bong-Chan Kho, 2011. "What Factors Drive Global Stock Returns?," The Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2527-2574.
    • Handle: RePEc:oup:rfinst:v:24:y:2011:i:8:p:2527-2574
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    File URL: http://hdl.handle.net/10.1093/rfs/hhr013
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    JEL classification:

    • F30 - International Economics - - International Finance - - - General

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