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Journal of Banking and Finance, 1997

Fundamental Determinants of National Equity Market Returns: A Perspective on Conditional Asset Pricing

Wayne E. Ferson

University of Washington, Seattle, WA 98195, USA
National Bureau of Economic Research, Cambridge, MA 02138, USA

Campbell R. Harvey

Duke University, Durham, NC 27708, USA
National Bureau of Economic Research, Cambridge, MA 02138, USA


This paper provides a global asset pricing perspective on the debate over the relation between predetermined attributes of common stocks, such as ratios of price-to-book-value, cash-flow, earnings, and other variables to the future returns. Some argue that such variables may be used to find securities that are systematically undervalued by the market, while others argue that the measures are proxies for exposure to underlying economic risk factors. We argue that it is not possible to distinguish between these views without explicitly modelling the relation between such attributes and risk factors. We present an empirical framework for attacking the problem at a global level, assuming integrated markets. Our perspective pulls together the traditional academic and practitioner viewpoints on lagged attributes, providing potential benefits from each viewpoint. We present new evidence using monthly data for 21 national equity markets. We find that the explanatory power of some attributes, such as price-to-book is related to global market risk-exposure. The predetermined attribute data present a powerful challenge for future research on global asset pricing models.