Global pricing of equity

Global equity management has historically been structured around country as set allocation. This approach was supported by the observations that the co untry factor is the major source of influence on stock-price behavior and t hat the correlation between equity and currency is close to zero and unstab le. If a corporation is regarded as a portfolio of international activities , however, its stock price should be influenced by international factors in relation to the geographical breakdown of its activities rather than where its headquarters is located or its stock is traded. We examined a large cr oss-section of security prices and found that regional factors and currency factors have a strong influence on asset returns beyond that of domestic f actors. Moreover, the sensitivity of individual company returns to nondomes tic factors is closely related to the extent of their international activit ies, as proxied by the relative importance of foreign sales to total sales. We review the implications of these findings for the asset management prof ession.