Choosing factors: the international evidence

Extending Fama and French's U.S. study on choosing factors to international equity markets, we test nested and non-nested asset pricing models for North America, Europe, Asia excluding Japan, and Japan. For non-nested models, we propose a new simulation methodology using a blocks bootstrap appr...

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Bibliographic Details
Published in:Applied economics 2022-02, Vol.54 (6), p.633-647
Main Authors: Grobys, Klaus, Kolari, James W.
Format: Article
Language:English
Subjects:
Asset pricing
asset pricing models
Economic analysis
Economic theory
international equity markets
Markets
maximum squared sharpe ratio
Profitability
Risk factors
Simulation
spanning regressions
Value
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Summary:Extending Fama and French's U.S. study on choosing factors to international equity markets, we test nested and non-nested asset pricing models for North America, Europe, Asia excluding Japan, and Japan. For non-nested models, we propose a new simulation methodology using a blocks bootstrap approach that takes into account factor dependencies. The resultant out-of-sample Sharpe ratios across all models and countries are lower than Fama and French's pairs bootstrap approach. While we confirm that the six-factor model with market, size, and small size spread factors for value, profitability, investment, and momentum produces the highest maximum squared Sharpe ratio in most economies, an exception is Asia excluding Japan. Additionally, spanning regressions reveal that size does not matter in any of the international equity markets, whereas value matters in Europe, Asia excluding Japan, and Japan.
ISSN:0003-6846
1466-4283
DOI:10.1080/00036846.2021.1967865