Time-Varying Risk Premia in Large International Equity Markets
57 Pages Posted: 18 Jan 2018 Last revised: 25 Oct 2018
Date Written: June 15, 2018
We estimate and test factor models with time-varying loadings and risk premia for a large unbalanced panel of 62,320 individual stock returns in 46 countries. First, we check that the tested factor models achieve weak cross-sectional dependence crucial for inference on risk premia. Adding an excess country market factor to world or regional market and non-market factors captures the factor structure for both developed and emerging markets. Second, we do not reject asset pricing restrictions in up to 91% of countries. Third, we uncover significant heterogeneity in level and dynamics of factor risk premia between and within developed and emerging markets.
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
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