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What Factors Drive Global Stock Returns?

Charles A. Dice Center Working Paper No. 2006-009

Fisher College of Business Working Paper No. 2006-03-009

65 Pages Posted: 15 Jun 2006 Last revised: 27 May 2011

Kewei Hou

Ohio State University (OSU) - Department of Finance

George Andrew Karolyi

Cornell University - Johnson Graduate School of Management

Bong-Chan Kho

Seoul National University, Business School

Date Written: January 4, 2011

Abstract

Using monthly returns for over 27,000 stocks from 49 countries over a three-decade period, we show that a multifactor model that includes factor-mimicking portfolios based on momentum and cash flow-to-price captures significant time series variation in global stock returns, and has lower pricing errors and fewer model rejections than the global CAPM or a popular model that uses size and book-to-market factors. We find reliable evidence that the global cash flow-to-price factor is related to a covariance risk model. In contrast, we reject the covariance risk model in favor of a characteristic model for size and book-to-market factors.

Keywords: International finance; asset pricing models; common factors

JEL Classification: F30, G14, G15

Suggested Citation

Hou, Kewei and Karolyi, George Andrew and Kho, Bong-Chan, What Factors Drive Global Stock Returns? (January 4, 2011). Charles A. Dice Center Working Paper No. 2006-009; Fisher College of Business Working Paper No. 2006-03-009. Available at SSRN: https://ssrn.com/abstract=908345 or http://dx.doi.org/10.2139/ssrn.908345

Kewei Hou

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

George Karolyi (Contact Author)

Cornell University - Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Bong-Chan Kho

Seoul National University, Business School ( email )

607 LG Hall
1 Gwanak-ro, Gwanak-gu
Seoul, 08826
Korea, Republic of (South Korea)
+82-2-880-8798 (Phone)
+82-2-876-8411 (Fax)

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