Expected Market Returns in the International Cross-Section

36 Pages Posted: 28 Sep 2020

See all articles by Henk Berkman

Henk Berkman

University of Auckland Business School

Hamish Malloch

The University of Sydney; Financial Research Network (FIRN)

Date Written: August 11, 2020

Abstract

Two recent articles, Martin (2017) and Chabi-Yo and Loudis (2019), derive a lower bound for the expected market risk premium that does not require parameter estimation and can be computed in real time. Based on evidence from 15 international markets, we cannot reject the hypothesis that these expected return lower bounds are tight. Furthermore, asset pricing factors that are insignificant in asset pricing tests if realized returns are used as expected return proxy become significant when expected market risk premium lower bounds are used instead; for example, the lower bound is higher for countries with greater exposure to global and regional stock markets and for countries with high exposure to the dollar and carry factors. Finally, we find that a strategy that takes a long position in markets with relatively high expected returns and a short position in markets with relatively low expected returns, yields statistically significant positive returns that are not explained by traditional risk factors.

Keywords: expected returns, options, asset pricing, international finance

JEL Classification: G12, G15

Suggested Citation

Berkman, Henk and Malloch, Hamish, Expected Market Returns in the International Cross-Section (August 11, 2020). Available at SSRN: https://ssrn.com/abstract=3671472 or http://dx.doi.org/10.2139/ssrn.3671472

Henk Berkman

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

Hamish Malloch (Contact Author)

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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