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Strategic returns to international diversification: An application to the equity markets of Europe, Japan and North America

John Ammer and Jianping Mei

European Financial Management, 1995, vol. 1, issue 1, 49-59

Abstract: We undertake a decomposition of the risk factor loadings of 15 national stock market returns from 1972 to 1990, using a variant of the Campbell‐Shiller (1988) linearisation. (Campbell, John Y. and Shiller, Robert J., ‘The dividend‐price ratio and expectations of future dividends and discount factors’, Review of Financial Studies, Vol. 1, 1988, pp. 195–228.) We find considerable variation among countries in the relative importance of a cash flow component and a discount rate component in determining the beta with the world equity index return and with other risk factors. Also, the substantial international heterogeneity in factor loadings suggests that a global portfolio allows ample hedging opportunities, presumably deriving from differences in underlying economic structure.

Date: 1995
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