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What Factors Drive Global Stock Returns

'What Factors Drive Global Stock Returns'
What Factors Drive Global Stock Returns? Kewei Hou Ohio State University G. Andrew Karolyi Cornell University Bong-Chan Kho Seoul National University Using monthly returns for over 27,000 stocks from 49 countries over a three-decade pe- riod, we show that a multifactor model that includes factor-mimicking portfolios based on momentum and cash flow-to-price captures significant time-series variation in global stock returns, and has lower pricing errors and fewer model rejections than the global CAPM or a popular model that uses size and book-to-market factors. We find reliable evidence that the global cash flow-to-price factor is related to a covariance risk model. In contrast, we reject the covariance risk model in favor of a characteristic model for size and book-to-market factors. (JEL F30, G14, G15) The identification of sources of return comovement and, hence, of possible sources of portfolio risk is a primary pursuit of researchers in the field of asset pricing and one of central importance to investment practitioners, especially those involved in global financial markets. The seminal international asset- pricingmodelsofSolnik(1974),Grauer,Litzenberger,andStehle(1976),Sercu (1980), Stulz (1981), and Errunza and Losq (1985) emphasize the importance of market-wide, consumption-based, or currency factor risks. Nevertheless, there is a growing amount of evidence that stock returns are related to fac- tors that are based on firm-level characteristics, such as size, book-to-market We thank the Dice Center for Research on Financial Economics, the BSI GAMMA Foundation, INQUIRE- UK, and the Institute of Management Research at Seoul National University for funding support. Helpful com- ments were received from Toby Moskowitz (editor), two anonymous referees, Michael Adler, Michael Brandt, Francesca Carrieri, Magnus Dahlquist, Gene Fama, Ken French, George Gao, Gabriel Hawawini, Steve Heston, Don Keim, Mark Lang, Kuan-Hui Lee, Roger Loh, David Ng, Mike Roberts, David Robinson, Ana Paula Serra, Rob Stambaugh, Ren´ e Stulz, and Alvaro Taboada, as well as from seminar participants at Barclays Global In- vestors, ISCTE (Portugal), Universidade do Porto, Ohio State, Wharton, Baruch, York, North Carolina, Duke, Vanderbilt, Purdue, Princeton, Notre Dame, Kansas, the CRSP Forum 2006, the Dimensional Fund Advisors 2007 Risk Conference, and the First International Conference on Asia-Pacific Financial Markets. Kewei Hou, Ohio State University, Fisher College of Business, Columbus, OH 43210; telephone: (614) 292-0552. E-mail: hou.28@osu.edu. Bong-Chan Kho, Seoul National University, College of Business Administration, Seoul 151- 916, South Korea; telephone: (82-2) 880-8798. E-mail: bkho@snu.ac.kr. Send correspondence to G. Andrew Karolyi, Cornell University, Johnson Graduate School of Management, Ithaca, NY 14853; telephone: (607) 255-2153. E-mail: gak56@cornell.edu. c ? The Author 2011. Published by Oxford University Press on behalf of The Society for Financial S
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