What Determines Expected International Asset Returns?
55 Pages Posted: 28 Dec 2000 Last revised: 26 Sep 2022
Date Written: February 1994
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 portfolio. 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.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Time-Varying World Market Integration
By Geert Bekaert and Campbell R. Harvey
-
Time-Varying World Market Integration
By Geert Bekaert and Campbell R. Harvey
-
Foreign Speculators and Emerging Equity Markets
By Geert Bekaert and Campbell R. Harvey
-
Foreign Speculators and Emerging Equity Markets
By Geert Bekaert and Campbell R. Harvey
-
The World Price of Foreign Exchange Risk
By Bernard Dumas and Bruno Solnik
-
Emerging Equity Market Volatility
By Geert Bekaert and Campbell R. Harvey
-
Emerging Equity Market Volatility
By Geert Bekaert and Campbell R. Harvey
-
Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets
By Geert Bekaert and Robert J. Hodrick