IMF Working Papers

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

By Marco Del Negro, Robin Brooks

March 1, 2005

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Marco Del Negro, and Robin Brooks. A Latent Factor Model with Global, Country, and Industry Shocks for International Stock Returns, (USA: International Monetary Fund, 2005) accessed December 10, 2024
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.

Subject: Capital adequacy requirements, Currencies, Market capitalization, Stock markets, Stocks

Keywords: Exposure portfolio, Market portfolio, WP

Publication Details

  • Pages:

    34

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2005/052

  • Stock No:

    WPIEA2005052

  • ISBN:

    9781451860719

  • ISSN:

    1018-5941