Factors and Risk Premia in Individual International Stock Returns

71 Pages Posted: 18 Jan 2018 Last revised: 18 Jan 2020

See all articles by Ines Chaieb

Ines Chaieb

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Hugues Langlois

HEC Paris - Finance Department

O. Scaillet

University of Geneva GSEM and GFRI; Swiss Finance Institute; University of Geneva - Research Center for Statistics

Date Written: January 15, 2020

Abstract

We propose an estimation methodology tailored for large unbalanced panels of individual stock returns to study the factor structure and risk premia in international stock markets. We show that the local market is necessary to capture the factor structure in both developed and emerging markets. Neither the presence of multiple world risk factors, regional risk factors, systematic currency risk factors, nor a country-specific currency subsume the importance of the local market factor. Then, we show that multi-factor models generate pricing errors of similar economic magnitude across markets but that these pricing errors dramatically spike during crises.

Keywords: approximate factor model, emerging markets, international asset pricing, large panel, market integration, time-varying risk premium

JEL Classification: C12, C13, C23, C51, C52 , G12, G15

Suggested Citation

Chaieb, Ines and Langlois, Hugues and Scaillet, Olivier, Factors and Risk Premia in Individual International Stock Returns (January 15, 2020). Swiss Finance Institute Research Paper No. 18-04; Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC; HEC Paris Research Paper No. FIN-2018-1250. Available at SSRN: https://ssrn.com/abstract=3103752 or http://dx.doi.org/10.2139/ssrn.3103752

Ines Chaieb (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+41223798568 (Phone)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Hugues Langlois

HEC Paris - Finance Department ( email )

France

Olivier Scaillet

University of Geneva GSEM and GFRI ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+ 41 22 379 88 16 (Phone)
+41 22 389 81 04 (Fax)

HOME PAGE: http://www.scaillet.ch

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva - Research Center for Statistics

Geneva
Switzerland

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