Firm Characteristics and Global Stock Returns: A Conditional Asset Pricing Model

This paper studies the relation between 39 firm-level characteristics and stock returns in 40 Non-U.S. countries using instrumented principal components analysis (IPCA). A conditional factor model with six latent factors does well in describing return variation, but contrary to studies for the U.S. market, characteristics continue to anomalously affect returns beyond instrumenting for systemic exposure. The global model performs better in emerging than in developed markets, while showing substantial differences across countries. On average, only ten characteristics contribute significantly to the models' performance. Market beta, investment, value and momentum characteristics do not instrument for systemic exposure.