A factor model for the cross-section of country equity risk premia
Date Issued
2025-02
Abstract
We employ instrumented principal component analysis (IPCA) to provide a new factor model for the cross-section of country equity risk premia. Using data from 71 equity markets, we identify latent factors and condition betas on a comprehensive set of accounting and market characteristics from the finance literature. A four-factor conditional asset pricing model best captures the variation in country returns, beating prominent factor models. IPCA’s superior performance stems primarily from its enhanced ability to predict emerging market returns while also generalizing well to developed markets. Among the global “signal zoo”, size, momentum, volatility, political risk, and valuation are the most important predictors of return differences.
Publisher
Elsevier BV
Institution
Type
journal article
Journal/Edited collection
ISSN
1872-6372
Band
171
Language
English