The Risk and Predictability of International Equity Returns

Abstract

We investigate predictability in national equity market returns, and its relation to global economic risks. We show how to consistently estimate the fraction of the predictable variation that is captured by an assetpricing modelfor the expected returns. We use a model in which conditional betas of the national equity markets depend on local information variables, while global risk premia depend on global variables. We examine singleand multiple-beta models, using monthly data for 1970 to 1989. The models capture much of thepredictability for many countries. Most of this is related to time variation in the global risk premia. We investigate the sources of risk and predictability of international equity market returns. We examine several global economic risk factors, including a world market portfolio, exchange rate fluctuations, mea