NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

An Exploratory Investigation of the Fundamental Determinants of National Equity Market Returns

Wayne E. Ferson, Campbell R. Harvey

NBER Working Paper No. 4595
Issued in December 1993
NBER Program(s):   AP   IFM

This paper studies average and conditional expected returns in national equity markets, and their relation to a number of fundamental country attributes. The attributes are organized into three groups. The first is relative valuation ratios, such as price-to-book-value, cash-flow, earnings and dividends. The second group measures relative economic performance and the third measures industry structure. We find that average returns across countries are related to the volatility of their price-to-book ratios. Predictable variation in returns is also related to relative gross domestic product, interest rate levels and dividend-price ratios. We explore the hypothesis that cross-sectional variation in the country attributes proxy for variation in the sensitivity of national markets to global measures of economic risks. We test single-factor and two-factor models in which countries' conditional betas are assumed to be functions of the more important fundamental attributes.

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Document Object Identifier (DOI): 10.3386/w4595

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