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What determines expected international asset returns ?

Author

Listed:
  • Bruno Solnik

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Campbell R. Harvey
  • Guofu Zhou

Abstract

This paper characterizes the forces that determine time-variation in expected international asset returns. We offer a number of innovations. By using the latent factor technique, we do not have to prespecify the sources of risk. We solve for the latent premiums and characterize their time-variation. We find evidence that the first factor premium resembles the expected return on the world market portfolio. However, the inclusion of this premium alone is not sufficient to explain the conditional variation in the returns. We find evidence of a second factor premium which is related to foreign exchange risk. Our sample includes new data on both international industry portfolios and international fixed income portfolios. We find that the two latent factor model performs better in explaining the conditional variation in asset returns than a prespecified two factor model. Finally, we show that differences in the risk loadings are important in accounting for the cross-sectional variation in the international returns.

Suggested Citation

  • Bruno Solnik & Campbell R. Harvey & Guofu Zhou, 1994. "What determines expected international asset returns ?," Working Papers hal-00607608, HAL.
    • Handle: RePEc:hal:wpaper:hal-00607608
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    More about this item

    Keywords

    time-variation; international; asset returns;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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