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Are the Fama and French Factors Global or Country Specific?

Are the Fama and French Factors Global or Country Specific? This article examines whether country-specific or global versions of Fama and French’s three-factor model better explain time-series variation in international stock returns. Regressions for portfolios and individual stocks indicate that domestic factor models explain much more time-series variation in returns and generally have lower pricing errors than the world factor model. In addition, decomposing the world factors into domestic and foreign components demonstrates that the addition of foreign factors to domestic models leads to less accurate in-sample and out-of-sample pricing. Practical applications of the three-factor model, such as cost of capital calculations and performance evaluations, are best performed on a country-specific basis. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

Are the Fama and French Factors Global or Country Specific?

The Review of Financial Studies , Volume 15 (3) – Apr 16, 2002

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Publisher
Oxford University Press
Copyright
Copyright The Society for Financial Studies 2002
ISSN
0893-9454
eISSN
1465-7368
DOI
10.1093/rfs/15.3.783
Publisher site
See Article on Publisher Site

Abstract

This article examines whether country-specific or global versions of Fama and French’s three-factor model better explain time-series variation in international stock returns. Regressions for portfolios and individual stocks indicate that domestic factor models explain much more time-series variation in returns and generally have lower pricing errors than the world factor model. In addition, decomposing the world factors into domestic and foreign components demonstrates that the addition of foreign factors to domestic models leads to less accurate in-sample and out-of-sample pricing. Practical applications of the three-factor model, such as cost of capital calculations and performance evaluations, are best performed on a country-specific basis.

Journal

The Review of Financial StudiesOxford University Press

Published: Apr 16, 2002

There are no references for this article.