The Role of Investability Restrictions on Size, Value, and Momentum in International Stock Returns
George Andrew Karolyi
Cornell University - Johnson Graduate School of Management
Cornell University - Department of Economics; Stevens Institute of Technology - Stevens Institute of Technology - School of Business
April 20, 2012
Johnson School Research Paper Series No. 12-2012
Using monthly returns for over 37,000 stocks from 46 developed and emerging market countries over a two-decade period, we test whether empirical asset pricing models capture the size, value, and momentum patterns in international stock returns. We propose and test a multi-factor model that includes factor portfolios based on firm characteristics and that builds separate factors comprised of globally-accessible stocks, which we call “global factors,” and of locally-accessible stocks, which we call “local factors.” Our new “hybrid” multi-factor model with both global and local factors not only captures strong common variation in global stock returns, but also achieves low pricing errors and rejection rates using conventional testing procedures for a variety of regional and global test asset portfolios formed on size, value, and momentum.
Keywords: International asset pricing, investment restrictions, cross-listed stocks
JEL Classification: F30, G11, G15
Date posted: April 22, 2012 ; Last revised: July 15, 2015
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