A Latent Factor Model with Global, Country, and Industry Shocks for International Stock Returns

Author/Editor:

Marco Del Negro ; Robin Brooks

Publication Date:

March 1, 2005

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

We estimate a latent factor model that decomposes international stock returns into global, country-, and industry-specific shocks and allows for stock-specific exposures to these shocks. We find that across stocks there is substantial dispersion in these exposures, which is partly explained by the extent to which firms operate across countries. We show that portfolios consisting of stocks with low exposures to country shocks achieve substantial variance reduction relative to the global market, both in- and out-of-sample. The shock exposures are thus a stock-selection device for international portfolio diversification.

Series:

Working Paper No. 2005/052

Subject:

Capital adequacy requirements Currencies Market capitalization Stock markets Stocks

English

Publication Date:

March 1, 2005

ISBN/ISSN:

9781451860719/1018-5941

Stock No:

WPIEA2005052

Pages:

34

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