Strategic returns to international diversification: an application to the equity markets of Europe, Japan, and North America

We undertake a decomposition of the risk factor loadings of fifteen national stock market returns from 1972 to 1990, using a variant of the Campbell-Shiller (1988) linearization. We find considerable variation among countries in the relative importance of a cash flow component and a discount rate component in determining the beta with the world equity index return and with other risk factors. Also, the international heterogeneity we find in factor loadings suggests that a global portfolio allows substantial hedging opportunities, presumably deriving from differences in underlying economic structure.Europe ; International finance ; Japan ; Stock market