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

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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.