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What Determines Expected International Asset Returns?

  • Campbell R. Harvey

    (Duke University
    National Bureau of Economic Research)

  • Bruno Solnik

    (HEC-School of Management)

  • Guofu Zhou

    (Washington University)

This paper characterizes the forces that determine time-variation in expected international asset returns. We offer a number of innovations. By using the latent factor technique, we do not have to prespecify the sources of risk. We solve for the latent premiums and characterize their time-variation. We find evidence that the first factor premium resembles the expected return on the world market porfolio. However, the inclusion of this premium alone is not sufficient to explain the conditional variation in the returns. We find evidence of a second factor premium which is related to foreign exchange risk. Our sample includes new data on both international industry portfolios and international fixed income portfolios. We find that the two latent factor model performs better in explaining the conditional variation in asset returns than a prespecified two factor model. Finally, we show that differences in the risk loadings are important in accounting for the cross-sectional variation in the international returns.

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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 503.

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Length: 49 pages
Date of creation: Nov 2002
Date of revision:
Publication status: Published in Annals of Economics and Finance, Society for AEF, vol. 3(2), pages 249-298, November 2002.
Handle: RePEc:cuf:wpaper:503
Contact details of provider: Web page: http://cema.cufe.edu.cn/

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