DP15503 Firms' Exposures to Geographic Risks

Author(s): Bernard J Dumas, Tymur Gabuniya, Richard C Marston
Publication Date: November 2020
Date Revised: March 2021
Keyword(s): country factors, expectations-maximization algorithm, factor models, geographic investing, stock return exposures, stock return indexes
JEL(s): C4, F3, F6, G1
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15503

The distinction between domicile and place of business is becoming more and more relevant as a growing number of firms have activities abroad. In most statistical studies of international stock returns, a firm is included in a country's index if its headquarters are located in that country. This classification scheme ignores the operations of the firm. We propose, instead, to measure the firm's exposures to "geographic zones" according to the place where they conduct business. As a representation of "geographic risks", we synthesize zone factors from all firms in the dataset, be they domestic firms or multinationals. And we show the properties of the exposures to the zone factors.