Global, Developed and Emerging Stock Market: Which Characteristic Matters?

ABSTRACT

This paper compares the explanations and predictabilities of 35 firm-level characteristics in stock returns between developed and ṆṆemerging stock markets using instrumented principal components analysis (IPCA). In contrast to the weak performance of the global model in each region, the local model performs better with lower mispricing errors at the individual and portfolio levels and exhibits significant differences across markets. Eleven characteristics significantly contribute to the global model’s performance, and each region has unique important characteristics, such as the change in gross property, plants, and equipment plus inventory in developed markets and the sale-to-book enterprise value in emerging markets. The incremental predictability of local characteristics is approximately 18% in developed regions and 7% in emerging markets. Openness and culture help explain the pricing differences in the local characteristics and factor models.

KEYWORDS:

• Global market
• developed and emerging market
• IPCA
• characteristic importance

JEL:

• F21
• G12
• G15

Acknowledgement

The authors are grateful for the very constructive comments and suggestions from the editor, four anonymous reviewers, Baoming Gao, Chunmin Zhang, Benjian Wu, Xueyong Zhang, Liqing Zhang, Zhanyu Ying, and the seminar participants at Central University of Finance and Economics. We appreciate the financial supports from the National Social Science Fund of China with grant number 22&ZD063, as well as the National Natural Science Foundation of China with grant numbers 72072193, 71872195.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1. Although Jensen et al. (2022) provide the data earlier than the year of 2005, we find the characteristic data is missing quit a lot before 2005, especially in the emerging regions, which would significantly affect the results (Svetlana et al., 2022).

2. We report the degree of Openness for each market in the Online Appendix Table C.

3. We report the degree of individualism for each market in the Online Appendix Table C.