Review of Financial Studies

We investigate predictability in national equity market returns, and its relation to global economic risks. We show how to consistently estimate the fraction of the predictable variation that is captured by an asset pricing model for the expected returns. We use a model in which conditional betas of the national equity markets depend on local information variables, while global risk premia depend on global variables. We examine single- and multiple-beta models, using monthly data for 1970 to 1989. The models capture much of the predictability for many countries. Most of this is related to time variation in the global risk premia.

The Risk and Predictability of International Equity Returns