Decomposing Differences in Portfolio Returns between North America and Europe

Abstract

This paper utilizes the Blinder-Oaxaca decomposition method and Distribution regression to investigate the reasons behind the differences in portfolio returns between North America and Europe. Our findings suggest that the majority of the differences can be attributed to disparities in risk premia, particularly in terms of market and size factors, with a smaller contribution from differences in risks. Additionally, we observe that the extent to which risk premia and risks explain the differences varies depending on the portfolio returns, indicating that the risk premia and risks in North America and Europe are subject to fluctuations over time. Importantly, our results remain robust even when changes are made to the structures used as references, decomposition orders, time periods, and data frequency.

Keywords: Distribution Regression, Blinder-Oaxaca Decomposition, Decomposition Analysis, Five-factor Asset Pricing Model, Counterfactual Distributions, Risk Premium

JEL Classification: C58, G12, G15