International Characteristic-Based Asset Pricing

74 Pages Posted: 28 Dec 2018 Last revised: 17 Aug 2019

See all articles by Murali Jagannathan

Murali Jagannathan

SUNY at Binghamton - School of Management

Wei Jiao

Rutgers School of Business-Camden, Rutgers University

Russ Wermers

University of Maryland - Robert H. Smith School of Business; European Corporate Governance Institute (ECGI)

Date Written: February 1, 2019


In this paper, we develop characteristic-based asset-pricing models for international stocks. We price stocks using passive portfolios created based on observable characteristics: market capitalization, book-to-market, prior-year return, growth of total assets, and operating profitability, each separately created for a given geographical region of the world. As such, our approach allows for segmentation in characteristic-based asset pricing among regions. Using a resampling micro-portfolio approach recently introduced by Barras (2018), we find that market capitalization is the most powerful characteristic in pricing international stocks, and that a three-characteristic model based on market capitalization, book-to-market, and prior-year return has the lowest pricing errors. We also show that characteristic-based benchmarks exhibit much lower pricing errors, relative to global factor-based models. We further apply our characteristic models to the equity holdings of U.S. funds that invest in international stocks. International index funds exhibit zero abnormal returns, while active funds that charge higher fees, and that mainly invest in small or mid-capitalization stocks, exhibit positive and significant abnormal returns. These results indicate that U.S.-domiciled active managers are able to generate abnormal returns in less-efficient sectors of non-U.S. stock markets, when expected returns are measured using characteristic-based pricing.

Keywords: International asset pricing, Characteristic-based asset-pricing models, International mutual funds

JEL Classification: G12, G15, G23

Suggested Citation

Jagannathan, Murali and Jiao, Wei and Wermers, Russell R., International Characteristic-Based Asset Pricing (February 1, 2019). Available at SSRN: or

Murali Jagannathan

SUNY at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States
607-777-4639 (Phone)

Wei Jiao (Contact Author)

Rutgers School of Business-Camden, Rutgers University

Camden, NJ 08102
United States

Russell R. Wermers

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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