Working Paper: NBER ID: w4595
Authors: Wayne E. Ferson; Campbell R. Harvey
Abstract: This paper studies average and conditional expected returns in national equity markets, and their relation to a number of fundamental country attributes. The attributes are organized into three groups. The first is relative valuation ratios, such as price-to-book-value, cash-flow, earnings and dividends. The second group measures relative economic performance and the third measures industry structure. We find that average returns across countries are related to the volatility of their price-to-book ratios. Predictable variation in returns is also related to relative gross domestic product, interest rate levels and dividend-price ratios. We explore the hypothesis that cross-sectional variation in the country attributes proxy for variation in the sensitivity of national markets to global measures of economic risks. We test single-factor and two-factor models in which countries' conditional betas are assumed to be functions of the more important fundamental attributes.
Keywords: national equity markets; expected returns; fundamental determinants; valuation ratios; economic performance; industry structure
JEL Codes: G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| volatility of price-to-book ratios (G17) | average returns across countries (O57) |
| relative GDP (E20) | average returns across countries (O57) |
| interest rate levels (E43) | average returns across countries (O57) |
| dividend-price ratios (G35) | average returns across countries (O57) |
| fundamental attributes (Y20) | expected returns (G17) |