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
Abstract
We examine the cross-sectional explanatory power of a number of country attributes to predict future relative returns in national equity markets. The attributes include ratios of price-to-book-value, cash-flow, earnings and dividends, and also volatility, lagged specific return, relative economic performance, and industry structure. We examine to what extent the attributes have explanatory power because they proxy for the exposures of the national equity markets to global economic risks. We use the world market portfolio and a measure of exchange risks as the global economic risk factors. If the attributes proxy for betas, and if their relation to beta differs across countries, then cross-sectional models which do not adjust for these differences are misspecified. We find that the explanatory power of some attributes, such as price-to-book is enhanced by making a risk-exposure adjustment.