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Country and Industry Dynamics in Stock Returns

Author/Editor: Catão, Luis | Timmermann, Allan
Authorized for Distribution: March 1, 2003
Electronic Access: Free Full Text (PDF file size is 1,671KB)
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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: A perennial question in international finance is to what extent stock returns are influenced by country-location, as opposed to industry-affiliation, factors. This paper develops a novel methodology to measure these effects, in which portfolios mimicking "pure" country and industry factors are first constructed and their joint dynamics then modeled as regime-switching processes. Estimation using global firm-level data allows us to identify well-defined volatility states over the past thirty years and shows that the contribution of the industry factor becomes systematically more prominent during high global volatility states, while the country factor contribution declines. Using the model's estimates, we find that portfolio diversification possibilities vary considerably across economic states.
 
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Series: Working Paper No. 03/52
Subject(s): Stock markets | International capital markets | Economic models
Author's keyword(s): Diversification | Risk | Volatility States | Regime Switching | International Financial markets
 
English  
    Published:   March 1, 2003        
    ISBN/ISSN:   0 / 1934-7073   Format:   Paper
    Stock No:   WPIEA0522003   Pages:   50
    Price:   US$15.00 (Academic Rate: US$15.00 )
       
     
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