What are the Global Sources of Rational Variation in International Equity Returns?

Technical Report Series No. 95-1

Posted: 24 Aug 1998

See all articles by Jia He

Jia He

The Chinese University of Hong Kong (CUHK) - Department of Finance

Lilian Ng

Schulich School of Business, York University; European Corporate Governance Institute (ECGI)

Abstract

This paper uses multivariate statistical approaches to investigate the global sources of international real return variation. These approaches allow us to take into account the widely-documented evidence that stock market returns from different countries move in tandem with each other. In the spirit of Fama (1990), we examine two potential sources of international real return variation: changes in expected future cash flows and changes in discount rates. In this study, common global economic variables that relate to changes in the global economy or to international business conditions serve as proxies for the two sources of variation. Our results show that these two sources of variation capture a statistically significant fraction of stock price variability; their explanatory power, however, differs across holding period horizons. While proxies for changes in discount rates have an incremental impact on both monthly and quarterly real returns, proxies for changes in expected future cash flows have only an incremental impact on quarterly real returns. Our results are also generally robust to the different methodologies employed.

JEL Classification: G12, G15

Suggested Citation

He, Jia and Ng, Lilian, What are the Global Sources of Rational Variation in International Equity Returns?. Technical Report Series No. 95-1, Available at SSRN: https://ssrn.com/abstract=6725

Jia He

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong
+882 2609 8568 (Phone)

Lilian Ng

Schulich School of Business, York University ( email )

N223, Seymour Schulich Building
4700 Keele Street
Toronto, Ontario ON M3J 1P3
Canada
+1.416.736.2100 x77994 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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