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Are Practitioners Right? On the Relative Importance of Industrial Factors in International Stock Returns

  • Dusan Isakov
  • Frédéric Sonney

This paper investigates the relative influences of industrial and country factors in international stock returns. Until very recently, academic research has consistently found that country factors dominate industrial factors. This result is in contradiction with practitioners beliefs. This paper re-examines this issue by analyzing a sample of more than 4000 stocks quoted in 20 developed countries. We find that on average the country effect still dominates stock returns over the period 1997-2000. This result has to be interpreted with caution though, as an analysis that allows for time-varying relative influences demonstrates the rapidly increasing impact of industry effects in recent times. We find, in particular, that this trend is common to all 20 developed countries considered and not only to those that are member of the European Monetary Union. We interpret this result as evidence of the increasing globalization of international equity markets.

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Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 140 (2004)
Issue (Month): III (September)
Pages: 355-379

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Handle: RePEc:ses:arsjes:2004-iii-4
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  1. Bolliger, Guido, 2004. "The characteristics of individual analysts' forecasts in Europe," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2283-2309, September.
  2. Gabriele Galati & Kostas Tsatsaronis, 2001. "The impact of the euro on Europe's financial markets," BIS Working Papers 100, Bank for International Settlements.
  3. Beckers, Stan & Grinold, Richard & Rudd, Andrew & Stefek, Dan, 1992. "The relative importance of common factors across the European equity markets," Journal of Banking & Finance, Elsevier, vol. 16(1), pages 75-95, February.
  4. Suits, Daniel B, 1984. "Dummy Variables: Mechanics v. Interpretation," The Review of Economics and Statistics, MIT Press, vol. 66(1), pages 177-80, February.
  5. Griffin, John M. & Andrew Karolyi, G., 1998. "Another look at the role of the industrial structure of markets for international diversification strategies," Journal of Financial Economics, Elsevier, vol. 50(3), pages 351-373, December.
  6. Lessard, Donald R, 1974. "World, National, and Industry Factors in Equity Returns," Journal of Finance, American Finance Association, vol. 29(2), pages 379-91, May.
  7. Kuo, Weiyu & E. Satchell, Stephen, 2001. "Global equity styles and industry effects: the pre-eminence of value relative to size," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 11(1), pages 1-28, March.
  8. Meyers, Stephen L, 1973. "A Re-Examination of Market and Industry Factors in Stock Price Behavior," Journal of Finance, American Finance Association, vol. 28(3), pages 695-705, June.
  9. Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, vol. 36(1), pages 3-27, August.
  10. Roll, Richard, 1992. " Industrial Structure and the Comparative Behavior of International Stock Market Indices," Journal of Finance, American Finance Association, vol. 47(1), pages 3-41, March.
  11. K. Rouwenhorst, 1998. "European Equity Markets and EMU: Are the Differences Between Countries Slowly Disappearing?," Yale School of Management Working Papers ysm103, Yale School of Management, revised 01 Aug 2000.
  12. Kennedy, Peter, 1986. "Interpreting Dummy Variables," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 174-75, February.
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