What Determines Expected International Asset Returns? / Campbell R. Harvey, Bruno Solnik, Guofu Zhou.

Format:

Book

Author/Creator:

Harvey, Campbell R.

Contributor:

National Bureau of Economic Research.

Solnik, Bruno.

Zhou, Guofu.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4660.

NBER working paper series no. w4660

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1994.

Summary:

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.

Notes:

Print version record

February 1994.