Working Paper: CEPR ID: DP10966
Authors: Ivan Petzev; Andreas Schrimpf; Alexander F. Wagner
Abstract: We show that in recent years global factor models have been catching up significantly with their local counterparts in terms of explanatory power (R²) for international stock returns. This catch-up is driven by a rise in global factor betas, not a rise in factor volatilities, suggesting that the effect is likely to be permanent. Yet, there is no conclusive evidence for a global factor model catch-up in terms of pricing errors (alpha) or a convergence in country-specific factor premia. These findings suggest that global financial markets have progressed surprisingly little towards fully integrated pricing, different from what should be expected under financial market integration. We discuss alternative explanations for these patterns and assess implications for practice.
Keywords: international asset pricing; size; value; momentum; financial integration; factor models
JEL Codes: F36; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Global factor models (F29) | Improved explanatory power (C29) |
| Increasing global factor betas (F62) | Improved explanatory power of global models (C59) |
| Local assets (R53) | Greater sensitivity to global factors (F69) |
| Global models (E17) | Stable pricing errors (alphas) (E31) |
| Local risk factors (R20) | Stable pricing errors (alphas) (E31) |