This paper examines the relative importance of global, country-specific, and industry-specific fa... more This paper examines the relative importance of global, country-specific, and industry-specific factors in both the cash flow and discount rate components of equity returns between 1995 and 2003. Our framework draws upon previously separate literatures on country versus industry effects and (forward-looking) cash flow versus discount rate components of equity return innovations. We apply the Campbell (1991) decomposition for industry-by-country,
This paper documents the impact of U.S. monetary policy announcement surprises on foreign equity ... more This paper documents the impact of U.S. monetary policy announcement surprises on foreign equity indexes, short- and long-term interest rates, and exchange rates in 49 countries. We use two proxies for monetary policy surprises: the surprise change to the current target federal funds rate (target surprise) and the revision to the path of future monetary policy (path surprise). We find
We evaluate the performance of U.S. investors' international portfolios over a 25-year period... more We evaluate the performance of U.S. investors' international portfolios over a 25-year period. Portfolio returns are formed by first estimating monthly bilateral holdings in 44 countries using high-quality but infrequent benchmark surveys that enable us to eliminate the geographical bias in reported capital flows data. In their foreign equity portfolios, U.S. investors achieved a significantly higher Sharpe ratio than global
This paper evaluates the ability of U.S. investors to allocate their foreign equity portfolios ac... more This paper evaluates the ability of U.S. investors to allocate their foreign equity portfolios across 44 countries over a 25-year period. We find that U.S. portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We test whether this strong performance owed to trading expertise or longer-term allocation expertise. The evidence is overwhelmingly against trading expertise. While
Counter to extant stylized facts, using newly available data on country allocations in U.S. inves... more Counter to extant stylized facts, using newly available data on country allocations in U.S. investors’ foreign equity portfolios we find that (i) U.S. investors do not exhibit returns-chasing behavior, but, consistent with partial portfolio rebalancing, tend to sell past winners; and (ii) U.S. investors increase portfolio weights on a country’s equity market just prior to its strong performance, behavior inconsistent
This introductory note summarizes and draws together the work reported in eight research papers w... more This introductory note summarizes and draws together the work reported in eight research papers written by staff economists of the Board's Division of International Finance as part of a project on global financial integration. The eight papers are also International Finance Discussion Papers, the numbers of which are specified on the table of contents that appears herein. When viewing this introduction online, the paper titles appearing on the table-of-contents page are web links that may be used to navigate directly to each paper's online file. All recent IFDPs are available on the Web at www.federalreserve.gov/pubs/ifdp/.
This paper investigates the trading of U.S. investors across 44 foreign equity markets over a 25-... more This paper investigates the trading of U.S. investors across 44 foreign equity markets over a 25-year period. We find that U.S. investors abstained from momentum trading and instead sold past winners. We then ascertain whether this trading strategy led to strong portfolio performance. We find that while U.S. portfolios did indeed achieve a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990, we cannot attribute this performance to trading expertise for two reasons. First, we find no evidence that these past winners subsequently underperformed. Second, conditional performance measures, which directly test reallocating into (out of) markets that subsequently outperformed (underperformed), suggest no significant trading expertise. Rather, the evidence suggests that the strong performance of U.S. investors' foreign portfolios owes to longer-term allocation expertise: If we fix portfolio weights at the end of 1989 and do not allow reallocations, we still find superior performance. Our results indicate that U.S. investors, in aggregate, cannot be labeled momentum traders and that the international portfolio performance of U.S. investors owes more to long-standing allocations rather than month-to-month trading expertise.
This paper studies the financial market responses to macroeconomic news an-nouncements, in the fo... more This paper studies the financial market responses to macroeconomic news an-nouncements, in the form of volatility and jumps. The traditional empirical literature using daily or lower-frequency data finds mixed or relatively weak evidence of big price movements during the announcement periods, which seems to falsify the efficient market hypothesis. However, with the advance of high frequency data, recent literature has discovered some links between macroeconomic news announcements and financial market responses. This paper extends the recent literature by separating market responses into continuous volatility and discontinuous jumps using some recent jump detection test statistics, and differentiating the market's disagreement based on survey data and uncertainty based on economic deriv-atives. Using more than a decade of high-frequency data, this paper finds that there are more large jumps on news days than on no-news days, with the fixed-income market being more responsive than...
This paper studies the transmission of volatility and trading activity in the foreign exchange ma... more This paper studies the transmission of volatility and trading activity in the foreign exchange market across trading regions for the euro-dollar and dollar-yen currency pairs, using highfrequency intraday data from Electronic Broking Services (EBS). In contrast with previous studies that use indicative quote frequency to proxy for trading activity, we use actual regional trading volume to identify five distinct trading regions in the foreign exchange market: Asia Pacific, the Asia-Europe overlap, Europe, the Europe-America overlap, and America. Based on realized volatility computed from high-frequency data and a regional volatility model, we find statistically significant evidence for volatility spillovers at both the own-region and the interregion levels, but the economic significance of own-region spillovers is much more important than that of inter-region spillovers. We also examine the transmission of trading activity (trading volume and number of transactions) across the five trading regions and find similar results to those for volatility, but the economic significance of own-region spillovers is even more dominant.
This paper documents the impact of U.S. monetary policy announcement surprises on foreign equity ... more This paper documents the impact of U.S. monetary policy announcement surprises on foreign equity indexes, short-and long-term interest rates, and exchange rates in 49 countries. We use two proxies for monetary policy surprises: the surprise change to the current target federal funds rate (target surprise) and the revision to the path of future monetary policy (path surprise). We find that different asset classes respond to different components of the monetary policy surprises. Global equity indexes respond mainly to the target surprise; exchange rates and long-term interest rates respond mainly to the path surprise; and short-term interest rates respond to both surprises. On average, a hypothetical surprise 25-basis-point cut in the federal funds target rate is associated with about a 1 percent increase in foreign equity indexes and a 5 basis point decline in foreign short-term interest rates. A surprise 25-basis-point downward revision in the path of future policy is associated with about a ½ percent decline in the exchange value of the dollar against foreign currencies and 5 and 8 basis points declines in short-and long-term interest rates, respectively. We also find that asset prices' responses to FOMC announcements vary greatly across countries, and that these cross-country variations in the response are related to a country's exchange rate regime. Equity indexes and interest rates in countries with a less flexible exchange rate regime respond more to U.S. monetary policy surprises. In addition, the crosscountry variation in the equity market response is strongly related to the percentage of each country's equity market capitalization owned by U.S. investors (a financial linkage), and the cross-country variation in short-term interest rates' responses is strongly related to the share of each country's trade that is with the United States (a real linkage). seminar participants in the FRB Finance Forum for helpful comments and suggestions and Bruce Gilsen for frequent help with SAS. Of course, we take responsibility for any and all errors. For questions and comments, please contact
This paper examines the relative importance of global, country-specific, and industryspecific fac... more This paper examines the relative importance of global, country-specific, and industryspecific factors in both the cash flow and discount rate components of equity returns between 1995 and 2003. Our framework draws upon previously separate literatures on country versus industry effects and (forward-looking) cash flow versus discount rate components of equity return innovations. We apply the Campbell (1991) decomposition for industry-by-country, allcountry, global industry, and world market index returns so we can produce a richer characterization of same-industry and same-country effects in stock returns. Unlike previous equity return decomposition papers, we exploit information in equity analysts' earnings forecasts when projecting future variables from our reduced-form equation systems. Our findings confirm previous research that finds patterns of correlation that suggest a richer underlying structure than just a single common global factor. Furthermore, our results suggest that global, within-country, and same-industry effects are all important for both of the two key components of stock returns: news about future dividends and news about future discount rates. In particular, within-industry covariation in news about future discount rates appears to be just as important as within-country covariation in news about future discount rates. We also find that the idiosyncratic component of cash flow news is more important than the global component, while the reverse is true for news about future discount rates. Our results are broadly consistent with co-movement in future discount rates arising from perceptions of common elements of risk, rather than national market segmentation.
This paper analyzes the impact of U.S. monetary policy announcement surprises on U.S. and foreign... more This paper analyzes the impact of U.S. monetary policy announcement surprises on U.S. and foreign firm-level equity prices. We find that U.S. monetary policy has important influences on foreign equity prices on average, but with considerable variation across firms. We have found that this differing response reflects a range of factors, including the extent of a foreign firm's exposure to U.S. demand, its dependence on external financing, the behavior of interest rates in its home country, and its sensitivity to portfolio adjustment by U.S. investors. The cross-firm variation in the response is correlated with the firm's CAPM beta; but it cannot fully explain this variation. More generally, we see these results as shedding some additional light on the nature and extent of the monetary and financial linkages between the United States and the rest of the world. In particular, since we are able to explain differences across foreign firms' responses through established theories of monetary transmission, our results are consistent with the surprisingly large average foreign response to U.S. rates reflecting fundamentals, rather than an across-the-board behavioral over-reaction.
We evaluate the performance of U.S. investors' international portfolios over a 25-year period. Po... more We evaluate the performance of U.S. investors' international portfolios over a 25-year period. Portfolio returns are formed by first estimating monthly bilateral holdings in 44 countries using high-quality but infrequent benchmark surveys that enable us to eliminate the geographical bias in reported capital flows data. In their foreign equity portfolios, U.S. investors achieved a significantly higher Sharpe ratio than global benchmarks, especially since 1990. We uncover three potential reasons for this success. First, they abstained from returns-chasing behavior and instead sold past winners. Second, conditional performance tests provide no evidence that the superior (unconditional) performance owed to private information, suggesting that the successful exploitation of publicly available information played a role. Third, well-documented preferences for cross-listed and well-governed foreign firms appear to have served U.S. investors well. We also evaluate the unconditional performance of bond portfolios, about which less information is available, and find that U.S. investors achieved higher Sharpe ratios than global benchmarks, although the difference here is not statistically significant.
This paper evaluates the ability of U.S. investors to allocate their foreign equity portfolios ac... more This paper evaluates the ability of U.S. investors to allocate their foreign equity portfolios across 44 countries over a 25-year period. We find that U.S. portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We test whether this strong performance owed to trading expertise or longer-term allocation expertise. The evidence is overwhelmingly against trading expertise. While U.S. investors did abstain from momentum trading and instead sold past winners, we find no evidence that these past winners subsequently underperformed. In addition, conditional performance measures, which directly test reallocating into (out of) markets that subsequently outperformed (underperformed), suggest no significant trading expertise. In contrast, we offer strong evidence of longer-term allocation expertise: If we fix portfolio weights at the end of 1989 and do not allow reallocations, we still find superior performance in the recent period.
Portfolio rebalancing is a key driver of the Uncovered Equity Parity (UEP) condition. According t... more Portfolio rebalancing is a key driver of the Uncovered Equity Parity (UEP) condition. According to UEP, when foreign equity holdings outperform domestic holdings, domestic investors are exposed to higher exchange rate exposure and hence repatriate some of the foreign equity to decrease their exchange rate risk. By doing so, foreign currency is sold, leading to foreign currency depreciation. We examine the relationship between U.S. investors' portfolio reallocations and returns and find some evidence consistent with UEP: Portfolio shifts are related to past returns in the underlying equity markets. But we argue that a motive other than reducing currency risk exposure is likely behind this rebalancing. In particular, U.S. investors rebalance away from equity markets that recently performed well and move into equity markets market just prior to relatively strong performance, suggesting tactical reallocations to increase returns rather than reduce risk.
This paper examines the relative importance of global, country-specific, and industryspecific fac... more This paper examines the relative importance of global, country-specific, and industryspecific factors in both the cash flow and discount rate components of equity returns between 1995 and 2003. Our framework draws upon previously separate literatures on country versus industry effects and (forward-looking) cash flow versus discount rate components of equity return innovations. We apply the Campbell (1991) decomposition for industry-by-country, allcountry, global industry, and world market index returns so we can produce a richer characterization of same-industry and same-country effects in stock returns. Unlike previous equity return decomposition papers, we exploit information in equity analysts' earnings forecasts when projecting future variables from our reduced-form equation systems. Our findings confirm previous research that finds patterns of correlation that suggest a richer underlying structure than just a single common global factor. Furthermore, our results suggest that global, within-country, and same-industry effects are all important for both of the two key components of stock returns: news about future dividends and news about future discount rates. In particular, within-industry covariation in news about future discount rates appears to be just as important as within-country covariation in news about future discount rates. We also find that the idiosyncratic component of cash flow news is more important than the global component, while the reverse is true for news about future discount rates. Our results are broadly consistent with co-movement in future discount rates arising from perceptions of common elements of risk, rather than national market segmentation.
This paper examines the relative importance of global, country-specific, and industry-specific fa... more This paper examines the relative importance of global, country-specific, and industry-specific factors in both the cash flow and discount rate components of equity returns between 1995 and 2003. Our framework draws upon previously separate literatures on country versus industry effects and (forward-looking) cash flow versus discount rate components of equity return innovations. We apply the Campbell (1991) decomposition for industry-by-country,
This paper documents the impact of U.S. monetary policy announcement surprises on foreign equity ... more This paper documents the impact of U.S. monetary policy announcement surprises on foreign equity indexes, short- and long-term interest rates, and exchange rates in 49 countries. We use two proxies for monetary policy surprises: the surprise change to the current target federal funds rate (target surprise) and the revision to the path of future monetary policy (path surprise). We find
We evaluate the performance of U.S. investors' international portfolios over a 25-year period... more We evaluate the performance of U.S. investors' international portfolios over a 25-year period. Portfolio returns are formed by first estimating monthly bilateral holdings in 44 countries using high-quality but infrequent benchmark surveys that enable us to eliminate the geographical bias in reported capital flows data. In their foreign equity portfolios, U.S. investors achieved a significantly higher Sharpe ratio than global
This paper evaluates the ability of U.S. investors to allocate their foreign equity portfolios ac... more This paper evaluates the ability of U.S. investors to allocate their foreign equity portfolios across 44 countries over a 25-year period. We find that U.S. portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We test whether this strong performance owed to trading expertise or longer-term allocation expertise. The evidence is overwhelmingly against trading expertise. While
Counter to extant stylized facts, using newly available data on country allocations in U.S. inves... more Counter to extant stylized facts, using newly available data on country allocations in U.S. investors’ foreign equity portfolios we find that (i) U.S. investors do not exhibit returns-chasing behavior, but, consistent with partial portfolio rebalancing, tend to sell past winners; and (ii) U.S. investors increase portfolio weights on a country’s equity market just prior to its strong performance, behavior inconsistent
This introductory note summarizes and draws together the work reported in eight research papers w... more This introductory note summarizes and draws together the work reported in eight research papers written by staff economists of the Board's Division of International Finance as part of a project on global financial integration. The eight papers are also International Finance Discussion Papers, the numbers of which are specified on the table of contents that appears herein. When viewing this introduction online, the paper titles appearing on the table-of-contents page are web links that may be used to navigate directly to each paper's online file. All recent IFDPs are available on the Web at www.federalreserve.gov/pubs/ifdp/.
This paper investigates the trading of U.S. investors across 44 foreign equity markets over a 25-... more This paper investigates the trading of U.S. investors across 44 foreign equity markets over a 25-year period. We find that U.S. investors abstained from momentum trading and instead sold past winners. We then ascertain whether this trading strategy led to strong portfolio performance. We find that while U.S. portfolios did indeed achieve a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990, we cannot attribute this performance to trading expertise for two reasons. First, we find no evidence that these past winners subsequently underperformed. Second, conditional performance measures, which directly test reallocating into (out of) markets that subsequently outperformed (underperformed), suggest no significant trading expertise. Rather, the evidence suggests that the strong performance of U.S. investors' foreign portfolios owes to longer-term allocation expertise: If we fix portfolio weights at the end of 1989 and do not allow reallocations, we still find superior performance. Our results indicate that U.S. investors, in aggregate, cannot be labeled momentum traders and that the international portfolio performance of U.S. investors owes more to long-standing allocations rather than month-to-month trading expertise.
This paper studies the financial market responses to macroeconomic news an-nouncements, in the fo... more This paper studies the financial market responses to macroeconomic news an-nouncements, in the form of volatility and jumps. The traditional empirical literature using daily or lower-frequency data finds mixed or relatively weak evidence of big price movements during the announcement periods, which seems to falsify the efficient market hypothesis. However, with the advance of high frequency data, recent literature has discovered some links between macroeconomic news announcements and financial market responses. This paper extends the recent literature by separating market responses into continuous volatility and discontinuous jumps using some recent jump detection test statistics, and differentiating the market's disagreement based on survey data and uncertainty based on economic deriv-atives. Using more than a decade of high-frequency data, this paper finds that there are more large jumps on news days than on no-news days, with the fixed-income market being more responsive than...
This paper studies the transmission of volatility and trading activity in the foreign exchange ma... more This paper studies the transmission of volatility and trading activity in the foreign exchange market across trading regions for the euro-dollar and dollar-yen currency pairs, using highfrequency intraday data from Electronic Broking Services (EBS). In contrast with previous studies that use indicative quote frequency to proxy for trading activity, we use actual regional trading volume to identify five distinct trading regions in the foreign exchange market: Asia Pacific, the Asia-Europe overlap, Europe, the Europe-America overlap, and America. Based on realized volatility computed from high-frequency data and a regional volatility model, we find statistically significant evidence for volatility spillovers at both the own-region and the interregion levels, but the economic significance of own-region spillovers is much more important than that of inter-region spillovers. We also examine the transmission of trading activity (trading volume and number of transactions) across the five trading regions and find similar results to those for volatility, but the economic significance of own-region spillovers is even more dominant.
This paper documents the impact of U.S. monetary policy announcement surprises on foreign equity ... more This paper documents the impact of U.S. monetary policy announcement surprises on foreign equity indexes, short-and long-term interest rates, and exchange rates in 49 countries. We use two proxies for monetary policy surprises: the surprise change to the current target federal funds rate (target surprise) and the revision to the path of future monetary policy (path surprise). We find that different asset classes respond to different components of the monetary policy surprises. Global equity indexes respond mainly to the target surprise; exchange rates and long-term interest rates respond mainly to the path surprise; and short-term interest rates respond to both surprises. On average, a hypothetical surprise 25-basis-point cut in the federal funds target rate is associated with about a 1 percent increase in foreign equity indexes and a 5 basis point decline in foreign short-term interest rates. A surprise 25-basis-point downward revision in the path of future policy is associated with about a ½ percent decline in the exchange value of the dollar against foreign currencies and 5 and 8 basis points declines in short-and long-term interest rates, respectively. We also find that asset prices' responses to FOMC announcements vary greatly across countries, and that these cross-country variations in the response are related to a country's exchange rate regime. Equity indexes and interest rates in countries with a less flexible exchange rate regime respond more to U.S. monetary policy surprises. In addition, the crosscountry variation in the equity market response is strongly related to the percentage of each country's equity market capitalization owned by U.S. investors (a financial linkage), and the cross-country variation in short-term interest rates' responses is strongly related to the share of each country's trade that is with the United States (a real linkage). seminar participants in the FRB Finance Forum for helpful comments and suggestions and Bruce Gilsen for frequent help with SAS. Of course, we take responsibility for any and all errors. For questions and comments, please contact
This paper examines the relative importance of global, country-specific, and industryspecific fac... more This paper examines the relative importance of global, country-specific, and industryspecific factors in both the cash flow and discount rate components of equity returns between 1995 and 2003. Our framework draws upon previously separate literatures on country versus industry effects and (forward-looking) cash flow versus discount rate components of equity return innovations. We apply the Campbell (1991) decomposition for industry-by-country, allcountry, global industry, and world market index returns so we can produce a richer characterization of same-industry and same-country effects in stock returns. Unlike previous equity return decomposition papers, we exploit information in equity analysts' earnings forecasts when projecting future variables from our reduced-form equation systems. Our findings confirm previous research that finds patterns of correlation that suggest a richer underlying structure than just a single common global factor. Furthermore, our results suggest that global, within-country, and same-industry effects are all important for both of the two key components of stock returns: news about future dividends and news about future discount rates. In particular, within-industry covariation in news about future discount rates appears to be just as important as within-country covariation in news about future discount rates. We also find that the idiosyncratic component of cash flow news is more important than the global component, while the reverse is true for news about future discount rates. Our results are broadly consistent with co-movement in future discount rates arising from perceptions of common elements of risk, rather than national market segmentation.
This paper analyzes the impact of U.S. monetary policy announcement surprises on U.S. and foreign... more This paper analyzes the impact of U.S. monetary policy announcement surprises on U.S. and foreign firm-level equity prices. We find that U.S. monetary policy has important influences on foreign equity prices on average, but with considerable variation across firms. We have found that this differing response reflects a range of factors, including the extent of a foreign firm's exposure to U.S. demand, its dependence on external financing, the behavior of interest rates in its home country, and its sensitivity to portfolio adjustment by U.S. investors. The cross-firm variation in the response is correlated with the firm's CAPM beta; but it cannot fully explain this variation. More generally, we see these results as shedding some additional light on the nature and extent of the monetary and financial linkages between the United States and the rest of the world. In particular, since we are able to explain differences across foreign firms' responses through established theories of monetary transmission, our results are consistent with the surprisingly large average foreign response to U.S. rates reflecting fundamentals, rather than an across-the-board behavioral over-reaction.
We evaluate the performance of U.S. investors' international portfolios over a 25-year period. Po... more We evaluate the performance of U.S. investors' international portfolios over a 25-year period. Portfolio returns are formed by first estimating monthly bilateral holdings in 44 countries using high-quality but infrequent benchmark surveys that enable us to eliminate the geographical bias in reported capital flows data. In their foreign equity portfolios, U.S. investors achieved a significantly higher Sharpe ratio than global benchmarks, especially since 1990. We uncover three potential reasons for this success. First, they abstained from returns-chasing behavior and instead sold past winners. Second, conditional performance tests provide no evidence that the superior (unconditional) performance owed to private information, suggesting that the successful exploitation of publicly available information played a role. Third, well-documented preferences for cross-listed and well-governed foreign firms appear to have served U.S. investors well. We also evaluate the unconditional performance of bond portfolios, about which less information is available, and find that U.S. investors achieved higher Sharpe ratios than global benchmarks, although the difference here is not statistically significant.
This paper evaluates the ability of U.S. investors to allocate their foreign equity portfolios ac... more This paper evaluates the ability of U.S. investors to allocate their foreign equity portfolios across 44 countries over a 25-year period. We find that U.S. portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We test whether this strong performance owed to trading expertise or longer-term allocation expertise. The evidence is overwhelmingly against trading expertise. While U.S. investors did abstain from momentum trading and instead sold past winners, we find no evidence that these past winners subsequently underperformed. In addition, conditional performance measures, which directly test reallocating into (out of) markets that subsequently outperformed (underperformed), suggest no significant trading expertise. In contrast, we offer strong evidence of longer-term allocation expertise: If we fix portfolio weights at the end of 1989 and do not allow reallocations, we still find superior performance in the recent period.
Portfolio rebalancing is a key driver of the Uncovered Equity Parity (UEP) condition. According t... more Portfolio rebalancing is a key driver of the Uncovered Equity Parity (UEP) condition. According to UEP, when foreign equity holdings outperform domestic holdings, domestic investors are exposed to higher exchange rate exposure and hence repatriate some of the foreign equity to decrease their exchange rate risk. By doing so, foreign currency is sold, leading to foreign currency depreciation. We examine the relationship between U.S. investors' portfolio reallocations and returns and find some evidence consistent with UEP: Portfolio shifts are related to past returns in the underlying equity markets. But we argue that a motive other than reducing currency risk exposure is likely behind this rebalancing. In particular, U.S. investors rebalance away from equity markets that recently performed well and move into equity markets market just prior to relatively strong performance, suggesting tactical reallocations to increase returns rather than reduce risk.
This paper examines the relative importance of global, country-specific, and industryspecific fac... more This paper examines the relative importance of global, country-specific, and industryspecific factors in both the cash flow and discount rate components of equity returns between 1995 and 2003. Our framework draws upon previously separate literatures on country versus industry effects and (forward-looking) cash flow versus discount rate components of equity return innovations. We apply the Campbell (1991) decomposition for industry-by-country, allcountry, global industry, and world market index returns so we can produce a richer characterization of same-industry and same-country effects in stock returns. Unlike previous equity return decomposition papers, we exploit information in equity analysts' earnings forecasts when projecting future variables from our reduced-form equation systems. Our findings confirm previous research that finds patterns of correlation that suggest a richer underlying structure than just a single common global factor. Furthermore, our results suggest that global, within-country, and same-industry effects are all important for both of the two key components of stock returns: news about future dividends and news about future discount rates. In particular, within-industry covariation in news about future discount rates appears to be just as important as within-country covariation in news about future discount rates. We also find that the idiosyncratic component of cash flow news is more important than the global component, while the reverse is true for news about future discount rates. Our results are broadly consistent with co-movement in future discount rates arising from perceptions of common elements of risk, rather than national market segmentation.
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