Country, Industry, and Risk Factor Loadings in Portfolio Management

This study of international stock returns between January 1992 and December 2000 shows that, on average, country effects dominated industry effects as an explanation of the sources of stock return variation. The authors also find across-country diversification to be more efficient than diversification across industries. During this period, country effects continued to decline, however, while industry effects increased in importance so that they exceeded the country effects in 1999–2000. When four global risk factor loadings are introduced, the same trends are observed for country and industry effects. More important, global risk effects were accentuated, becoming even more significant than country and industry effects in 2000.