In a financially integrated global market, the conditionally expected return on a portfolio of securities from a particular country is determined by the country's world risk exposure. This paper measures the conditional risk of 17 countries. The reward per unit of risk is the world price of covariance risk. Although the tests provide evidence on the conditional mean variance efficiency of the benchmark portfolio, the results show that countries' risk exposures help explain differences in performance. Evidence is also presented which indicates that these risk exposures change through time and that the world price of covariance risk is not constant.

Value stocks have higher returns than growth stocks in markets around the world. For the period 1975 through 1995, the difference between the average returns on global portfolios of high and low book-to-market stocks is 7.68 percent per year, and value stocks outperform growth stocks in twelve of thirteen major markets. An international capital asset pricing model cannot explain the value premium, but a two-factor model that includes a risk factor for relative distress captures the value premium in international returns. INVESTMENT MANAGERS CLASSIFY FIRMS that have high ratios of book-to-market equity ~B0M!, earnings to price ~E0P!, or cash flow to price ~C0P! as value stocks. Fama and French ~1992, 1996! and Lakonishok, Shleifer, and Vishny ~1994! show that for U.S. stocks there is a strong value premium in average returns. High B0M, E0P, or C0P stocks have higher average returns than low B0M, E0P, or C0P stocks. Fama and French ~1995! and Lakonishok et al. ~1994! also show that the value premium is associated with relative distress.

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We review the international finance literature to assess the extent to which international factors affect financial asset demands and prices. International asset pricing models with mean-variance investors predict that an asset’s risk premium depends on its covariance with the world market portfolio and, possibly, with exchange rate changes. The existing empirical evidence shows that a country’s risk premium depends on its covariance with the world market portfolio and that there is some evidence that exchange rate risk affects expected returns. However, the theoretical asset pricing literature relying on mean-variance optimizing investors fails in explaining the portfolio holdings of investors, equity flows, and the time-varying properties of correlations across countries. The home bias has the effect of increasing local influences on asset prices, while equity flows and cross-country correlations increase

Abstract: We explore the link between international stock market comovement and the degree to which firms operate globally. Using stock returns and balance sheet data for companies in twenty countries, we estimate a factor model that decomposes stock returns into global, country- and industry-specific shocks. We find a large and highly significant link: a firm raising its international sales by 10 percent raises the exposure of its stock return to global shocks by 2 percent and reduces its exposure to country-specific shocks by 1.5 percent. This link has grown stronger over time since the mid-1980s. JEL classification: G11, G15 Key words: diversification, risk, international financial markets, industrial structure The paper was prepared for the IMF conference on “Global Linkages. ” We thank our discussant, Kathryn Dominguez, and other participants for many helpful comments. We are also grateful to John Campbell, Stefano Cavaglia, Marcelle Chauvet, Kristin Forbes, Ashoka Mody, Geert Rouwenhorst, Dan Waggoner, participants in the 2003 AEA annual meetings session on “Global Linkages ” and the Atlanta Fed Finance Brown Bag for their suggestions, Menzie Chinn for sharing his capital account liberalization measure with us, Iskander Karibzhanov for translating some of our code into C, and Young Kim for

In this paper, we focus on the tails of the unconditional distribution of latin American emerging markets stock returns. We explore their implications for portfolio diversification according to the safety first principle, first proposed by Roy (1952). We find that the Latin American emerging markets have significantly fatter tails than industrial markets, especially, the lower tail of the distribution. We consider the implication of the safety first principle for a U.S. investor who creates a diversified portfolio using Latin America stock markets. We find that a U.S. investor gains by adding Latin American equity markets to her purely domestic portfolio. For different parameter specifications, we find a more realistic asset allocation than the one suggested by the literature based on the traditional meanvariance framework. JEL: C53, G15 The well documented high average stock returns and their low correlations with industrial markets

We use a quantile-based measure of conditional skewness or asymmetry of asset returns that is robust to outliers and therefore particularly suited for recalcitrant series such as emerging market returns. We study the following portfolio returns: developed markets, emerging markets, the world, and separately 73 countries. We find that the conditional asymmetry of returns varies significantly over time. This is true even after taking into account conditional volatility effects and unconditional skewness effects in returns. Interestingly, we find that the conditional asymmetry in developing countries features low correlation with that in emerging markets. This finding has implications for portfolio allocation, given the fact that the correlation of the returns themselves has been historically high and is increasing. In contrast to conditional volatility fluctuations, which are hard to explain with macroeconomic fundamentals, we find a strong relationship between the conditional skewness and macroeconomic variables. Moreover, the low correlation between conditional asymmetry across developed and emerging markets can be explained by macroeconomic fundamental factors in the cross-section, as both markets feature opposite responses to those fundamentals. The economic significance of the

Motivated by the original Black (1974), Adler-Dumas (1975), Subrahmanyam (1975) and Stulz (1981) restricted international capital asset pricing models (ICAPM), we extend Connor's (1984) well-diversified portfolio and factor pricing construct to the restricted international market case. Analogous to the Errunza-Losq (1985) partially restricted ICAPM, we identify the pricing implications of multi-factor risk structures in a partially restricted factor economy. To link the restricted market and factor pricing constructs, we admit `local' or country-specific well-diversified factor portfolios. As in Connor's `global' well-diversifed factor portfolio case, we find that globally-traded (internationally unrestricted) factor risks have equal prices across investors (countries). However, binding cross-country investment restrictions and locally well-diversified factor portfolios result in identical factor risks that have different factor prices across investors (countries). Therefore, well-dive...

this paper, the term spillover effects refers to the empirical observation that returns in New York impact next day returns in Tokyo and vice versa. French (1980) examines U.S. return data and finds that Monday's mean return is negative and significantly different from other days of the week. This much-researched phenomenon is known as the U.S.-Monday effect.

This paper empirically examines multifactor asset pricing models for the returns and expected returns on eighteen national equity markets. The factors are chosen to measure global economic risks. Although previous studies do not reject the unconditional mean variance efficiency of a world market portfolio, our evidence indicates that the tests are low in power, and the world market betas do not provide a good explanation o cross-sectional differences in average returns. Multiple beta models provide an improved explanation of the equity returns.