WHAT ARE THE GLOBAL SOURCES OF RATIONAL VARIATION IN INTERNATIONAL EQUITY RETURNS

This paper uses multivariate statistical approaches to investigate the global sources of international real return variation. These approach es allow us to take into account the widely-documented evidence that s tock market returns from different countries move in tandem with each other. In the spirit of Fama [Fama, E. F. (1990) Stock returns, expect ed returns, and real activity. Journal of Finance 45, 89-108.] we exam ine two potential sources of international real return variation: chan ges in expected future cash flows and changes in discount rates. In th is study, common global economic variables that relate to changes in t he global economy or to international business conditions serve as pro xies for the two sources of variation. Our results show that these two sources of variation capture a statistically significant fraction of stock: price variability; their explanatory power, however, differs ac ross holding period horizons. While proxies for changes in discount ra tes have an incremental impact on both monthly and quarterly real retu rns, proxies for changes in expected future cash flows have only an in cremental impact on quarterly real returns. Our results are also gener ally robust to the different methodologies employed. (C) 1997 Elsevier Science Ltd. All rights reserved.