Industry versus country effects in stock returns: the significance of value-weighted versus equal-weighted estimation
by Jianguo Chen; Martin Young; Andrea Bennett
International Journal of Portfolio Analysis and Management (IJPAM), Vol. 1, No. 3, 2013

Abstract: Using European market data from 1980 to 2007, we re-examine the commonly used Heston and Rouwenhorst methodology for determining the relative effects of industry and country factors in portfolio performance. The whole estimation involves two sets of weighting method; one is in the restrictive conditions and the other in the regression process. We explain that the former does not change the nature of the regression; it is the latter that determines the nature of the regression result (value-weighted vs. equal-weighted estimation). When using the equal-weighted regression, our results show the country effect dominating until the late 1990s and from then the industry effect becomes more important. However, when using the value-weighted method the industry effect has dominated over the entire period. Previous studies claim a value weighted method and report the same as our equal-weight result. We believe this is caused by confusing the two weighting methods. This study clarifies this issue.

Online publication date: Sat, 05-Jul-2014

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