Abstract
Global asset pricing models have failed to capture the cross-section of country equity returns. Emerging markets display robust positive pricing errors, and country-level characteristics play a role in pricing international equities. This paper offers a risk-based explanation for such asset pricing deviations. A world credit risk factor is significantly priced in the cross-section of country equity returns. In its presence, the positive pricing errors in emerging markets disappear and country-level characteristics no longer play a role. The risk premium for exposure to the credit risk factor is 80 basis points per month and has increased in recent years.
| Original language | American English |
|---|---|
| Pages (from-to) | 112-152 |
| Number of pages | 41 |
| Journal | Review of Asset Pricing Studies |
| Volume | 2 |
| Issue number | 2 |
| DOIs | |
| State | Published - Dec 2012 |
Bibliographical note
Funding Information:This work was supported by Inquire Europe and the Q-group. We are particularly grateful to the editor, Wayne Ferson, and an anonymous referee for suggestions that have substantially improved the paper. We also thank Campbell Harvey, Vihang Errunza, Armen Hovakimian, Sergio Mayordomo, Alexi Savov, Timothy Simin, and participants at the 11th Annual Darden International Finance Conference, the 2012 SFS Finance Cavalcade, the Second CNMV International Conference on Securities Markets, and seminars at Baruch College, the Hebrew University of Jerusalem, Southern Methodist University, and the Federal Reserve Board for valuable comments and suggestions. We are grateful to Andrew Karolyi, Kuan-Hui Lee, and Andreas Schrimpf for providing us with their international asset pricing factors. Send correspondence to Alexander Philipov, George Mason University, School of Management, MSN 5F5, 4400 University Drive, Fairfax, VA 22030; telephone: (703) 993-9762. E-mail: aphilipo@gmu.edu.
Funding Information:
This work was supported by Inquire Europe and the Q-group. We are particularly grateful to the editor, Wayne Ferson, and an anonymous referee for suggestions that have substantially improved the paper. We also thank CampbellHarvey, Vihang Errunza, Armen Hovakimian, Sergio Mayordomo, Alexi Savov, Timothy Simin, and participants at the 11th Annual Darden International Finance Conference, the 2012 SFS Finance Cavalcade, the Second CNMV International Conference on Securities Markets, and seminars at Baruch College, the Hebrew University of Jerusalem, Southern Methodist University, and the Federal Reserve Board for valuable comments and suggestions. We are grateful to Andrew Karolyi, Kuan-Hui Lee, and Andreas Schrimpf for providing us with their international asset pricing factors.
Publisher Copyright:
© 2012 The Author.