Vanguard provides the basics on International Stock Markets:
link: International Investing
1. The Worldwide Equity Premium: A Smaller Puzzle by Dimson, Elroy, Marsh, Paul and Staunton, Mike (April 2006)
We use a new database of long-run stock, bond, bill, inflation, and currency returns to estimate the equity risk premium for 17 countries and a world index over a 106-year interval. Taking U.S. Treasury bills (government bonds) as the risk-free asset, the annualised equity premium for the world index was 4.7% (4.0%). We report the historical equity premium for each market in local currency and US dollars, and decompose the premium into dividend growth, multiple expansion, the dividend yield, and changes in the real exchange rate. We infer that investors expect a premium on the world index of around 3-3 1/2% on a geometric mean basis, or approximately 4 1/2-5% on an arithmetic basis.
2. The Long Term Risks Of Global Stock Markets by Phillipe Jorion
This research investigates the persistence of investment risk across time horizon, a crucial issue in asset allocation decisions. Previous empirical results have focused mainly on US data and suffer from limited sample size in the analysis of long-horizon returns. Investigation of a long-term sample of thirty countries provides additional empirical evidence. The results are not reassuring. There is no evidence of long-term mean reversion in the expanded data sample. Downside risk is not reduced as the horizon lengthens. On the positive side, a globally diversified portfolio would have displayed much less downside risk than any single market.
3. Long Term Global Market Correlations by William N. Goetzmann, Lingfeng Li and Geert Rouwenhorst (February 2002)
In this paper we examine the correlation structure of the major world equity markets over 150 years. We find that correlations vary considerably through time and are highest during periods of economic and financial integration such as the late 19th and 20th centuries. Our analysis suggests that the diversification benefits to global investing are not constant, and that they are currently low compared to the rest of capital market history. We decompose the diversification benefits into two parts: a component that is due to variation in the average correlation across markets, and a component that is due to the variation in the investment opportunity set. There are periods, like the last two decades, in which the opportunity set expands dramatically, and the benefits to diversification are driven primarily by the existence of marginal markets. For other periods, such as the two decades following World War II, risk reduction is due to low correlations among the major national markets. From this, we infer that periods of globalization have both benefits and drawbacks for international investors. They expand the opportunity set, but diversification relies increasingly on investment in emerging markets.
4. Value versus Growth:The International Evidence by Eugene Fama and Ken French
Value stocks have higher returns than growth stocks in markets around the world. For 1975-95, the difference between the average returns on global portfolios of high and low book-to-market stocks is 7.60% per year, and value stocks outperform growth stocks in 12 of 13 major markets. An international CAPM cannot explain the value premium, but a two-factor model that includes a risk factor for relative distress captures the value premium in international returns.
5 . International Investment For Retirement Savers: Historical Evidence On Risk And Returns by Gary Burtless (February 2007)
An important decision facing retirement savers is how to allocate their savings across different assets. The decision includes the choice of how to divide investments between domestic and foreign holdings. This study uses return data from 1927-2005 to determine whether cross-border investing in the past would have been advantageous to retirement savers in eight large industrialized countries. For retirement savers in most countries, though not the United States, na�ve overseas investment strategies would also have reduced the risk of catastrophically poor investment performance. In all countries, retirement savers who selected a global portfolio allocation along the efficient frontier could obtain better average pensions with lower risk of very small pensions than savers who restrict their investments to the domestic stock and bond funds.
contribution by Adrian Nenu
6. Emerging Stock Market Returns by Laurent Geerhaert (February 2007)
With a double-digit growth rate in total market capitalization over the last decade, emerging stocks are becoming an increasingly important investment category. Emerging market equities behave in a different way from equities traded on developed markets. In the literature, there is usually a consensus on at least four distinguishing factors of emerging market stock returns: (1) volatility is high, (2) correlations with developed market returns are low, (3) returns are predictable to a certain extent, (4) third and fourth moments matter. However, opinions differ about average attractiveness of realized returns in emerging markets, depending on the period studied, the region, and the methodologies.
This paper surveys the wide literature around marginal and expected moments of the distribution of emerging stock returns, It reviews literature findings in a structure per statistical moment. Then it examines the potential applicability of the CAPM in emerging markets. Finally, it exposes avenues for further research identified from the survey.
contribution by Adrian Nenu
Return to the Table of Contents