Factors and Risk Premia in Individual International Stock Returns
We propose an estimation methodology tailored for large unbalanced panels of individual stock returns to study the factor structure and risk premia in international stock markets. We show that the local market is necessary to capture the factor structure in both developed and emerging markets. Neither the presence of multiple world risk factors, regional risk factors, systematic currency risk factors, nor a country-specific currency subsume the importance of the local market factor. Then, we show that multi-factor models generate pricing errors of similar economic magnitude across markets but that these pricing errors dramatically spike during crises.