Fundamental Determinants of National Equity Market Returns: A Perspective on Conditional Asset Pricing

60 Pages Posted: 27 Oct 2005

See all articles by Wayne E. Ferson

Wayne E. Ferson

University of Southern California; National Bureau of Economic Research (NBER)

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Date Written: August 1996

Abstract

This paper provides a global asset pricing perspective on the debate over the relation between predetermined attributes of common stocks, such as ratios of price-to-book-value, cash-flow, earnings, and other variables to the future returns. Some argue that such variables may be used to find securities that are systematically undervalued by the market, while others argue that the measures are proxies for exposure to underlying economic risk factors. It is not possible to distinguish between these views without explicitly modelling the relation between such attributes and risk factors. We present an empirical framework for attacking the problem at a global level, assuming integrated markets. Our perspective pulls together the traditional academic and practitioner viewpoints on lagged attributes. We present new evidence on the relative importance of risk and mispricing effects, using monthly data for 21 national equity markets. We find that the cross-sectional explanatory power of the lagged attributes is related to both risk and mispricing in the two-factor model, but the risk effects explain more of the variance than mispricing.

This paper is an unabridged version of our 1997 publication in the Journal of Banking and Finance.

Keywords: International asset pricing, fundamental ratios, country risk, time-varying risk, valuation

JEL Classification: G15, G12, G11

Suggested Citation

Ferson, Wayne E. and Harvey, Campbell R., Fundamental Determinants of National Equity Market Returns: A Perspective on Conditional Asset Pricing (August 1996). Available at SSRN: https://ssrn.com/abstract=826046 or http://dx.doi.org/10.2139/ssrn.826046

Wayne E. Ferson

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

HOME PAGE: http://www-rcf.usc.edu/~ferson/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

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