Esther Eiling, Bruno Gerard, Pierre Hillion, Frans A. De Roon
We examine the relative importance of country, industry, world market and currency risk factors for international stock returns. Our approach focuses on testing the mean-variance efficiency of the various factor portfolios. An unconditional analysis does not show significant differences between country, industry and world portfolios, nor any role for currency risk factors. However, when we allow expected returns, volatilities and correlations to vary over time, we find that equity returns are mainly driven by global industry and currency risk factors. We propose a novel test to evaluate the relative benefits of alternative investment strategies and find that including currencies is critical to take full advantage of the diversification benefits afforded by international markets. © 2012 Elsevier Ltd.
University of Toronto, Rotman School of Management, Toronto, ON M5S 3E6, 105 St. George Street, Canada; Norwegian School of Management BI, Tilburg University, 0442 Oslo, Nydalsveien 37, Norway; INSEAD, 138676 SGP, 1 Ayer Rajah Avenue, Singapore; Tilburg University, 5000 LE Tilburg, P.O. Box 90153, Netherlands
