A factor model for the cross-section of country equity risk premia

Christian Fieberg, Gerrit Liedtke, Adam Zaremba and Nusret Cakici

Journal of Banking & Finance, 2025, vol. 171, issue C

Abstract: We employ instrumented principal component analysis (IPCA) to provide a new factor model for the cross-section of country equity risk premia. Using data from 71 equity markets, we identify latent factors and condition betas on a comprehensive set of accounting and market characteristics from the finance literature. A four-factor conditional asset pricing model best captures the variation in country returns, beating prominent factor models. IPCA’s superior performance stems primarily from its enhanced ability to predict emerging market returns while also generalizing well to developed markets. Among the global “signal zoo”, size, momentum, volatility, political risk, and valuation are the most important predictors of return differences.

Keywords: Instrumented principal component analysis; IPCA; International asset pricing; Factor model; Return predictability; Equity anomalies; Country equity risk premium; Cross-section of stock returns (search for similar items in EconPapers)
JEL-codes: C38 G10 G11 G12 G15 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:171:y:2025:i:c:s0378426624002875

DOI: 10.1016/j.jbankfin.2024.107373

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