International Price and Earnings Momentum

International Price and Earnings Momentum

Leippold, Markus and Lohre, Harald, (March 4, 2008)

Abstract:

We find that price and earnings momentum are pervasive features of developed equity markets when controlling for multiple testing issues. Having ruled out data snooping as possible explanation for both phenomena, the evidence becomes even more startling. Recently, Chordia and Shivakumar (2006) argue that U.S. price momentum is subsumed by earnings momentum. We replicate their empirical finding for the U.S. and show that it does carry over to Europe on an aggregate level, but it does not apply to each and every European country. While the above explanation seems to be confined to certain time periods, earnings momentum nevertheless appears to be a crucial factor in explaining the price momentum anomaly in many developed markets. Since we cannot establish a decent relation between the earnings momentum phenomenon and macroeconomic risks we suspect a behavioral-based explanation to be at work. Narrowing the search for such a behavioral explanation we provide evidence that the anomaly is most likely not related to dispersion in analysts' earnings forecast.

Middle East and North Africa Markets: Investment Challenges and Market Structure

Middle East and North Africa Markets: Investment Challenges and Market Structure

Zaher, Tarek S., (November 1, 2007). Networks Financial Institute Working Paper No. 2007-WP-30

Abstract

This paper highlights the major developments and structural changes in the Middle East and North Africa (MENA) markets. Noticeable growth was observed in these markets during the last decade. This is evidenced from the record growth rates in market capitalization, number of listed companies, value traded and shares traded in most of the MENA capital markets. Stock market boom was also observed, by the end of 2005, in many of the MENA countries. This was followed by a major correction (crash) in these MENA countries. To support the growth in capital markets and attract more local and foreign investors, MENA markets would need continue to incorporate changes to procedures, laws and the professional infrastructure within the financial market and better dissemination of information. Compliance with international and regional laws is also essential for a healthy development.

The paper also examines the evidence underlying the notion that there is increased integration of MENA and developed country financial markets and that MENA market equities do not represent a separate asset class. We analyze the correlation structures among individual country equity markets and efficient frontiers over two sub periods. We also analyze the structure of the correlations among political risk indicators for a similar group of countries over similar time periods. The results of the study suggest that capital market integration has accelerated in recent years, both economically and politically, but only for three countries in the MENA region. We therefore conclude that the MENA market countries should continue to be viewed as separate asset class from developed countries. These markets seem to be highly segmented and provide great diversification potentials to global investors.

International Stock Market Correlations: A Sectoral Approach

International Stock Market Correlations: A Sectoral Approach

Fasnacht, Philipp and Louberge, Henri, (December 2007). Paris December 2007 Finance International Meeting AFFI-EUROFIDA

Abstract:

A lot of studies dealing with international correlations look only at correlations at the market level and often use its time-varying nature as motivation for their work. However, why and how market correlations change is a point that is still not very well understood. As the market is composed of different sectors, we propose to look into this question by studying the behavior of equity correlations at the sectoral level. We show how sectoral correlation coefficients determine the market correlation coefficient and decompose the latter into two parts; one that represents country factors and one that represents industry factors. This decomposition allows us to get a clear idea on how and why market correlations change over time. We also get some interesting insights such as market level correlations are higher on average than sectoral correlations as well as that sectoral correlations between countries tend to do be more stable over time than market level correlations and sectoral correlations within countries. Finally, we present evidence that a few sector correlations related to Financial, Industrial and Consumer Services segments drive the evolution of the market level correlation.

Factor Funds, Mean-Variance Efficiency, and the Gains From International Diversification

Factor Funds, Mean-Variance Efficiency, and the Gains From International Diversification

Eun, Cheol S., Lai, Sandy and Zhang, Zhe, (August 2007)

Abstract:

We propose a new investment strategy employing “factor funds” to systematically enhance the mean-variance efficiency of international diversification. Our approach is motivated by evidence from the empirical asset pricing literature and the direct link between factor-based asset pricing tests and investors' portfolio allocation problem. The success of size (SMB), book-to-market (HML), and momentum (MOM) factors in explaining stock returns and the country-specific properties of these factors imply that international factor funds can significantly enhance portfolio efficiency beyond what can be achieved by country market indices alone. Using data from ten developed countries over 1981-2004, we show that the Sharpe ratio of the “augmented” optimal portfolio involving international factor funds (0.76) far exceeds that of the “benchmark” optimal portfolio comprising country market indices only (0.19), strongly rejecting the intersection hypothesis which posits that the international factor funds do not span investment opportunities beyond what country market indices do. Among the three classes of factor funds, HML funds contribute most to the efficiency gains. The added gains from international factor diversification are significant for both in- and out-of-sample periods, and for a realistic range of additional investment costs for factor funds, and remain robust over time

This post has been added to Asset Class Reader: International Stocks

Asset Class Reader: International Stocks

Asset Class Reader: International Stocks

The following papers analyze International and Emerging Market stocks.

International Equity Investing: Long Term Expectations and Short Term Departures: Vanguard Institutional Research

International equity: Considerations and recommendations: Vanguard Institutional Research

The Worldwide Equity Premium: A Smaller Puzzle: Dimson, Elroy, Marsh, Paul and Staunton, Mike

The Long Term Risks of Global Stock Markets: Jorion,Phillipe

Value vs. Growth: The International Evidence: Fama,Eugene and French,Kenneth R.

Factor Funds, Mean-Variance Efficiency, and the Gains From International Diversification: Eun, Cheol S., Lai, Sandy and Zhang, Zhe

Long Term Global Market Correlations: Goetzmann,William N., Li,Lingfeng and Rouwenhorst,K. Geert

Investing in Emerging Markets: Vanguard Institutional Investors