Choosing Factors: The International Evidence

29 Pages Posted: 18 Oct 2019 Last revised: 31 Dec 2019

See all articles by Klaus Grobys

Klaus Grobys

University of Vaasa

James W. Kolari

Texas A&M University - Department of Finance

Date Written: October 9, 2019

Abstract

Extending Fama and French’s (2018) U.S. study on choosing factors to international equity markets, we test nested and non-nested asset pricing models for North America, Europe, Asia excluding Japan, and Japan. For non-nested models, we propose a new simulation methodology using a blocks bootstrap approach that takes into account factor dependencies. The resultant out-of-sample Sharpe ratios across all models and countries are lower than Fama and French’s pairs bootstrap approach. While we confirm that the six-factor model with market, size, and small size spread factors for value, profit, investment, and momentum produces the highest maximum squared Sharpe ratio in most economies, an exception is Asia excluding Japan. Additionally, spanning regressions reveal that size does not matter in any of the international equity markets, whereas value matters in Europe, Asia excluding Japan, and Japan.

Keywords: risk factors, maximum squared Sharpe ratio, asset pricing models, spanning regressions

JEL Classification: G12, G14

Suggested Citation

Grobys, Klaus and Kolari, James W., Choosing Factors: The International Evidence (October 9, 2019). Available at SSRN: https://ssrn.com/abstract=3466805 or http://dx.doi.org/10.2139/ssrn.3466805

Klaus Grobys (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
FIN-65101 Vaasa
Finland

James W. Kolari

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

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