Country and sector effects in international stock returns revisited.

The starting point of this paper is the Heston and Rouwenhorst (1994) methodology, which decomposes stock returns into four factors: market factor, country factor, sector factor and idiosyncratic factor; all with unit exposures. First, we explain why discarding small firms may overstate the relative importance of sector effects in international stock returns: small caps turn out to have an above average variability (after controlling for sector and country effects) and to be less exposed to their global sector index than large caps. Secondly, we show that the unit exposure assumption in Heston and Rouwenhorst (1994) is empirically not valid, and we accordingly generalize the HR-methodology by taking into account the unequal distribution of exposures along countries and sectors. Thirdly, we decompose the stacked variance of exposures and factors into his moments and correct it for estimation error in the xposures. We show that ignoring exposures and estimation error in the exposures may also overstate the impact of sector effects on international stock returns. Lastly, we show that there is no necessary link between the outcome of the HR-methodology and benefits of international risk diversification.Determinants; Characteristics; Stock returns; Belgian firms; Variability; Distribution;

CAPM tests and alternative factor portfolio composition: getting the alphas right.

We show that the results of a CAPM test are quite sensitive to the details of the test design. Especially crucial are the aspects related to the weight one gives to small, low-reputation stocks when constructing both the factor portfolios and the test or style portfolios whose returns are to be explained. To fit our observed returns we need to redesign the size and distress factor portfolios into two factor portfolios each, one for extremely small or distressed stocks relative to non-extreme stocks, and one for moderately small or distressed stocks versus larger or growth companies. This alternative model does a better job in pricing stocks, both in the US and internationally, than the standard four-factor CAPM model with factor portfolios designed following Fama and French (1992, 1993, 1995, 1996a, 1996b, 1998, 2000), Carhart (1997), Jegadeesh and Titman (1993) and Rouwenhorst (1999).Capital structure; Structure; Product; Markets; Market; Tests; Portfolio;

International portfolio diversification: Do industry factors dominate country factors?.

Despite recent reports to the contrary, we find that even recently-the 1991-2000 period-the country factor still dominates industry influences. This conclusion is robust to different test formats although the relative magnitude of the two sources of variation changes widely. One factor affecting the degree of country-factor dominance is the presence or absence of smallcap stocks in the sample: small-caps have an above average variability (after controlling for industry and country effects) and are also less sensitive to their global industry index than large-caps. Another factor that matters is the country coverage (especially the presence of emerging markets) and the level of industry aggregation (NACE 3 versus 4, for example). Methodology matters too. Heston and Rouwenhorst (1994) rank the world, country, and industry factors on the basis of their own variance, but this ranking may miss the ranking on the basis of stock-return variance explained if exposures are dissimilarly distributed across factors. Finding that the assumption of similar exposures is, in general, not realistic, we incorporate the distributions of the exposures into the assessment of the relative importance of country v industry factors, taking care to purge out the variability due to estimation error. By this metric, the dominance of the country factor becomes unassailable.Country; Industry; Variability; Effects; Indexes; Markets; Market; Factors; Variance; Distribution;

CAPM tests and alternative factor portfolio composition: getting the alphas right.

We show that the results of a CAPM test are quite sensitive to the details of the test design. Especially crucial are the aspects related to the weight one gives to small, low-reputation stocks when constructing both the factor portfolios and the test or style portfolios whose returns are to be explained. To fit our observed returns we need to redesign the size and distress factor portfolios into two factor portfolios each, one for extremely small or distressed stocks relative to non-extreme stocks, and one for moderately small or distressed stocks versus larger or growth companies. This alternative model does a better job in pricing stocks, both in the US and internationally, than the standard four-factor CAPM model with factor portfolios designed following Fama and French (1992, 1993, 1995, 1996a, 1996b, 1998, 2000), Carhart (1997), Jegadeesh and Titman (1993) and Rouwenhorst (1999).Asset pricing; Factors; International finance; Small firms; Tests; Portfolio;

Country and sector effects in international stock returns revisited.

Country; Effects; International; Sector; Stock returns; Finance; Management; Germany;

The small firm anomaly: US and international evidence.

The results of a CAPM test are sensitive to aspects related to the weight one gives to small, low-visibility stocks when constructing the portfolios whose returns serve as left- and right-hand-side variables. It turns out to be the result of a marketwide factor rather than a stock characteristic. To fit the observed returns it suffices to redesign the size and book-to-market factor portfolios into two factor portfolios each, one for the smallest or highest book-to-market stocks relative to other stocks, and one for moderately small or high book-to-market stocks versus larger or growth companies. This alternative 6-factor model does a better job in pricing stocks, both in the US and internationally, than Carhart's 4-factor CAPM with factor portfolios designed following Fama and French (1992, 1993, 1995, 1996a, 1996b, 1998, 2000), Carhart (1997), Jegadeesh and Titman (1993) and Rouwenhorst (1999). The fact that we can resolve mispricing by adding factors rather than characteristics, rules out dataResearch; Impact; Determinants; Firms; Product; Market; Competition; Ownership; Performance; Characteristics; Belgian firms; Control; Companies; Firm performance; International; Portfolio; Variables; Size; Growth; Model; Job; Pricing; Factors; Rules; Data;

Performance of Belgian mutual funds : do size and momentum matter ?.

In light of the well-known empirical failures of the one-factor CAPM, mutual-fund performance evaluation should venture beyond the one-factor type of performance analysis. In this paper we introduce momentum and size factors into the picture, and evaluate the performance of a large set of equity funds managed in Belgium. There is a fairly strong exposure to the small-firm effect, but the evidence of momentum chasing is less clear-cut and, if anything, seems to be negative. As in other studies, the average fund underperforms. Nor do we find any instances of excess performance when grouping funds by management company.Companies; Evaluation; Factors; Management; Momentum; Mutual fund performance;