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Country factors in stock returns: reconsidering the basic method

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  • Y. Bai

Abstract

Many studies show that country effects dominate in determining the stock return cross-sectional variations. After removing three potential distortions (domestic inflation rate, exchange rate and local risk-free interest rate), we find that the common practice of decomposing the nominal return converted into a single currency misestimates the importance of country effects, and hence may lead to incorrect inferences regarding portfolio diversification.

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  • Y. Bai, 2014. "Country factors in stock returns: reconsidering the basic method," Applied Financial Economics, Taylor & Francis Journals, vol. 24(13), pages 871-888, July.
    • Handle: RePEc:taf:apfiec:v:24:y:2014:i:13:p:871-888
    DOI: 10.1080/09603107.2014.909571
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    References listed on IDEAS

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    1. Juan Antonio Montecino & Jose Antonio Cordero, 2010. "Capital Controls and Monetary Policy in Developing Countries," CEPR Reports and Issue Briefs 2010-10, Center for Economic and Policy Research (CEPR).
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    3. Lieven Baele & Koen Inghelbrecht, 2005. "Structural versus Temporary Drivers of Country and Industry Risk," International Finance 0511005, University Library of Munich, Germany.
    4. Gooptu, Sudarshan, 1993. "Portfolio investment flows to emerging markets," Policy Research Working Paper Series 1117, The World Bank.
    5. Christopher J. Neely, 1999. "An introduction to capital controls," Review, Federal Reserve Bank of St. Louis, vol. 81(Nov), pages 13-30.
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    Cited by:

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    2. Nicolas S. Magner & Nicolás Hardy & Tiago Ferreira & Jaime F. Lavin, 2023. "“Agree to Disagree”: Forecasting Stock Market Implied Volatility Using Financial Report Tone Disagreement Analysis," Mathematics, MDPI, vol. 11(7), pages 1-16, March.
    3. Garay, Urbi & González, Maximiliano & Rosso, John, 2019. "Country and industry effects in corporate bond spreads in emerging markets," Journal of Business Research, Elsevier, vol. 102(C), pages 191-200.

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