DP10966 Has the Pricing of Stocks Become More Global?

Author(s): Ivan Petzev, Andreas Schrimpf, Alexander F Wagner
Publication Date: November 2015
Keyword(s): factor models, financial integration, international asset pricing, momentum, size, value
JEL(s): F36, G12, G15
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10966

We show that in recent years global factor models have been catching up significantly with their local counterparts in terms of explanatory power (R²) for international stock returns. This catch-up is driven by a rise in global factor betas, not a rise in factor volatilities, suggesting that the effect is likely to be permanent. Yet, there is no conclusive evidence for a global factor model catch-up in terms of pricing errors (alpha) or a convergence in country-specific factor premia. These findings suggest that global financial markets have progressed surprisingly little towards fully integrated pricing, different from what should be expected under financial market integration. We discuss alternative explanations for these patterns and assess implications for practice.