Global versus Local Asset Pricing: A New Test of Market Integration

Hau, Harald

doi:10.1093/rfs/hhr094

Cited by 46 publications

(26 citation statements)

References 39 publications

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“…A country with a high home preference i > W will have a high demand for local equity; but that demand must global asset pricing implications are related to those of large global index revisions that also modify the amount of freely traded global equity contributed by each country; see Hau (2010). The fact that other cross-sectional studies on large-scale asset supply shocks find strong evidence in favor of the CAPM model lends some support to our paper.…”

Section: Equilibrium Holdings and Home Biassupporting

confidence: 68%

A Global Equilibrium Asset Pricing Model with Home Preference

Solnik

Zuo

2012

Management Science

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International audienceWe develop a global equilibrium asset pricing model assuming that investors suffer from foreign aversion, a preference for home assets based on familiarity. Using a utility formulation inspired by regret theory, we derive closed-form solutions. When the degree of foreign aversion is high in a given country, investors place a high valuation on domestic equity, which results in a low expected return. Thus, the model generates the simple prediction that a country's degree of home bias and the expected return of its domestic assets should be inversely related. Our predicted relation between the degree of home bias and a country's expected return has the opposite sign predicted by models that assume some form of market segmentation. Using International Monetary Fund portfolio data, we find that expected returns are negatively related to home bias

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Section: Equilibrium Holdings and Home Biassupporting

confidence: 68%

A Global Equilibrium Asset Pricing Model with Home Preference

Solnik

Zuo

2012

Management Science

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“…While Fama and French (2012) and Kuo and Satchell (2001) find that the global markets still show signs of segmentation, other studies find integration and equities being priced globally (Diermeier and Solnik 2001;Ferson and Harvey 1993;Hau 2011;Longin and Solnik 1995;Sharma and Seth 2012). While the developed markets show strong signs of integration, Bekaert and Harvey (1995) find that emerging markets do not show complete integration.…”

Section: Literature Reviewmentioning

confidence: 96%

Are U.S. growth and value stocks similarly integrated with the world markets? A test across business cycles

Rana

Phillips

2016

Applied Economics

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Utilizing the bivariate GARCH-in-mean methodology, this study examines the strength of global risk premia using 10 major foreign stock markets with two style-based, large-cap U.S. index funds and S&P500, for the period 1993-2014. We incorporated seven U.S. business cycles. The foreign risk premium was found to be significantly strong for both growth and value stocks, and the S&P500 index, indicating that U.S. integration within global market is strong and persistent over the past 20 years. We report distinct risk characteristics owing to global linkages, for the two style-based U.S. funds over different business cycles. The foreign risk premium for growth stocks is mostly positive and especially high during contractions; in contrast, the value stocks demand more premiums during expansions. The growth and value linkages with foreign countries also vary quite substantially over the business cycles. A possible sign of convergence is the decreasing difference between value and growth foreign risk premiums, post-2001, perhaps indicative of greater domestic and global market integration. Our results support a solid, continuing trend of U.S. integration within global markets, with an influential role of business cycles.

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“…Lastly, we test how mutual funds responded to a particular MSCI methodological change event that implied an overall index redefinition (also exploited by Hau et al, 2010 andHau, 2011). In December 2000, MSCI announced that it would change all its indexes to adjust the market capitalization by the free-float rate (the proportion of the stocks publicly available), (Table 3).…”

Section: Benchmarks and Asset Allocationsmentioning

confidence: 99%