Published online by Cambridge University Press: 19 March 2018
We propose a new multi-factor model for international stock returns that includes size, value, and momentum factor portfolios and that builds them in a partial-segmentation capital market framework. Accounting for externalities driven by the incomplete accessibility to stocks and stock markets, our model not only captures strong common variation in international stock returns but also achieves low pricing errors and rejection rates relative to pure segmentation and pure integration models. This partial-segmentation approach is evaluated using monthly returns for over 37,000 stocks from 46 developed and emerging market countries over 2 decades and for a wide variety of test assets.
We are grateful for detailed comments from Ken French, for useful conversations with Francesca Carrieri, Bernard Dumas, Vihang Errunza, Cheol Eun, Gene Fama, Kingsley Fong, Amit Goyal, John Griffin, David Hirshleifer, Kewei Hou, Bong-Chan Kho, Robert Kieschnick, Pam Moulton, Paolo Pasquariello, Ali Reza, Scott Richardson, Richard Roll, Bernell Stone, René Stulz, Harry Turtle, Raman Uppal, Hao Wang, Tianyu Wang, Xiaoyan Zhang, and for feedback from workshop participants at BYU, University of Cambridge, Cass Business School, Cheung Kong, Copenhagen Business School, Cornell University, EPFL Lausanne, Florida International University, University of Geneva, Imperial College, INSEAD, Université Laval, London Business School, London School of Economics and Political Science, University of Oxford, Pace University, University of Rochester, Southern Methodist University, Stockholm School of Economics, University of Texas at Dallas, Tsinghua University, Tulane University, University of Warwick, the 2013 University College Dublin Conference, the 2012 Tel Aviv Finance Conference, and the 2011 Australasian Banking and Finance Conference. One anonymous referee, Sandro Andrade (a referee), and Hendrik Bessembinder (the editor) have greatly improved this paper, for which we are grateful. Financial support from the Alumni Professorship in Asset Management at Cornell University is gratefully acknowledged. All remaining errors are our own. This paper has previously circulated under the titles “The Role of Investability Restrictions on Size, Value, and Momentum in International Stock Returns” and “Size, Value, and Momentum in International Stock Returns: A New Partial-Segmentation Approach.”