Working Paper: NBER ID: w9344
Authors: Stefano Cavaglia; Robert J. Hodrick; Moroz Vadim; Xiaoyan Zhang
Abstract: We investigate the ability of several international asset pricing models to price the returns on 36 FTSE global industry portfolios. The models are the international capital asset pricing model (ICAPM) the ICAPM with exchange risks, and global two-factor and three-factor Fama-French (1996, 1998) models. We apply the methodology of Hansen and Jagannathan (1997). While all of the models can correctly price the basic assets, exchange risks are unimportant and only the global three-factor Fama-French model passes a robustness check which requires the models to also price portfolios sorted by book-to-market ratio.
Keywords: International Asset Pricing Models; Global Industry Portfolios; Fama-French Model
JEL Codes: G12; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global three-factor Fama-French model (C39) | pricing of portfolios sorted by book-to-market ratios (G12) |
| exposure to global risk factors (F65) | return pricing (D49) |
| pricing errors associated with models (D43) | cross-sectional average return spreads (G12) |
| ICAPM and its exchange risk variant (F31) | pricing of portfolios sorted by book-to-market ratios (G12) |