Pricing the Global Industry Portfolios
Stefano Cavaglia, Robert J. Hodrick, Moroz Vadim, Xiaoyan Zhang
We investigate the ability of several international asset pricing models to price the returns on 36 FTSE global industry portfolios. The models are the international capital asset pricing model (ICAPM) the ICAPM with exchange risks, and global two-factor and three-factor Fama-French (1996, 1998) models. We apply the methodology of Hansen and Jagannathan (1997). While all of the models can correctly price the basic assets, exchange risks are unimportant and only the global three-factor Fama-French model passes a robustness check which requires the models to also price portfolios sorted by book-to-market ratio.