Country factors in stock returns: reconsidering the basic method

Y. Bai

Applied Financial Economics, 2014, vol. 24, issue 13, 871-888

Abstract: Many studies show that country effects dominate in determining the stock return cross-sectional variations. After removing three potential distortions (domestic inflation rate, exchange rate and local risk-free interest rate), we find that the common practice of decomposing the nominal return converted into a single currency misestimates the importance of country effects, and hence may lead to incorrect inferences regarding portfolio diversification.

Date: 2014
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DOI: 10.1080/09603107.2014.909571

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