What Determines Expected International Asset Returns?

Campbell Harvey, Bruno Solnik and Guofu Zhou
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Bruno Solnik: HEC-School of Management

No 503, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: This paper characterizes the forces that determine time-variation in expected international asset returns. We offer a number of innovations. By using the latent factor technique, we do not have to prespecify the sources of risk. We solve for the latent premiums and characterize their time-variation. We find evidence that the first factor premium resembles the expected return on the world market porfolio. However, the inclusion of this premium alone is not sufficient to explain the conditional variation in the returns. We find evidence of a second factor premium which is related to foreign exchange risk. Our sample includes new data on both international industry portfolios and international fixed income portfolios. We find that the two latent factor model performs better in explaining the conditional variation in asset returns than a prespecified two factor model. Finally, we show that differences in the risk loadings are important in accounting for the cross-sectional variation in the international returns.

Keywords: International investment; Asset pricing; Latent variables; Exchange rate risk; Factor models (search for similar items in EconPapers)
JEL-codes: C13 F21 G15 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2002-11
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Citations: View citations in EconPapers (38)

Published in Annals of Economics and Finance, Society for AEF, vol. 3(2), pages 249-298, November 2002.

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Related works:
Journal Article: What Determines Expected International Asset Returns? (2002)
Working Paper: What determines expected international asset returns ? (1994)
Working Paper: What determines expected international asset returns ? (1994)
Working Paper: What Determines Expected International Asset Returns? (1994)
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:wpaper:503

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