Are international value premiums driven by the same set of fundamentals? |
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| Institution: | 1. DSB 302, McMaster University, Hamilton, ON L8S 4M4, Canada;2. DSB A210, McMaster University, Hamilton, ON L8S 4M4, Canada;1. Research Department, Hong Kong Monetary Authority, 55/F, Two International Finance Centre, 8, Finance Street, Central, Hong Kong, China;2. Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong, China;1. Department of Statistics, College of Business, National Taipei University, Taiwan, ROC;2. Department of Finance, National Taiwan University, Taiwan, ROC;3. College of Management, Yuan Ze University, Taiwan, ROC;1. National Oceanography Centre, Southampton, UK;2. ESA/ESRIN, Frascati, Italy;3. RHEA-System, Frascati, Italy;4. British Oceanographic Data Centre, UK |
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| Abstract: | This paper investigates the long-run behaviour of international value premium price indices for G7 countries using data from January 1975 to December 2002. We use Johansen Johansen, S., 1991. Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica 59, 1551–1580; Johansen, S., 1995. Likelihood-based Inference in Cointegrated Vector Autoregressive Models, Oxford University Press] cointegration methodology and find one cointegrating vector for the period of December 1987 to December 2002. The results are robust to local currencies and a common currency. The cointegrating vector may reflect expectations about future economic activity since investors can adjust demand for either value or growth stocks depending on expected economic growth. Our results show that the cointegrating relationship can predict both future changes in the growth of logged industrial production and future stock market returns. |
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