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An Exploratory Investigation of the Fundamental Determinants of National Equity Market Returns

The Internationalization of Equity Markets, (1994):59-138

Wayne Ferson

Campbell R. Harvey

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 are 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 pfice-to-book ratios. Predictable variation in returns is also related to relative gross domestic product (GDP), interest rate levels. and dividend-price ratios. We explore the hypothesis that cross-sectional variation in the country attributes proxies 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.